Analysis: Slow, steady tops fast trading on Wall Street

Wed Mar 7, 2012 1:10pm EST
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By Herbert Lash

NEW YORK (Reuters) - Today's coda for investing in the market calls for rapid-fire trading and an eye for the next hot sector. The investing heroes in this world are hedge funds such as Renaissance Technologies, which made founder James Simons a billionaire with its computer-driven, high turnover trading.

And yet, an informal study of U.S. mutual funds shows that managers who churn through their portfolios are underperforming those who hold investments for longer periods.

The hair-trigger trading strategies used by a number of hedge funds ran into trouble last year, when worries over the U.S. budget, European debt crisis, Japanese tsunami and North Africa unrest whipsawed markets and left investors frustrated over when to get in and out.

The mutual fund study, from Thomson Reuters' Lipper Inc, examined about 75 categories of funds over various lengths of time, finding that longer-held portfolios outdo about 70 percent of the time those funds holding stocks for only a short period.

Low turnover - less than 30 percent a year, or far below the historic average - often beats turnover that is four times greater or more, the data showed.

A longer holding period is a surprising antidote to the poor returns that plagued hedge funds last year. Many hedge funds are driven by fundamentals, but their holding periods are typically short - at times three days or less.

Hedge funds over the past decade turned over an average 35 percent of their positions every quarter at an annualized rate of nearly 140 percent, according to Goldman Sachs research.


The Wall Street sign is seen in front of the New York Stock Exchange January 22, 2008. REUTERS/Chip East