The point of actively managed funds is not so much to "beat the market", it's to provide diversified returns via strategies that are uncorrelated with the market.
On average, the S&P500 has returned about 7% annually. If I had a strategy that returned 5% on average but was totally uncorrelated with the S&P, then you'd get the best overall long-term returns (maximize the geometric average of annual returns) by investing in a combination of my strategy and the S&P.
This is a kind of revisionism that mostly took off after Warren Buffet won his bet that hedge funds would not outperform the market over a 10 year time period.
The original goal and selling point of hedge funds was to produce consistent results regardless of the market's performance by using long and short positions to provide absolute returns in any market environment.
With that said, even if you accept the revisionism, it's untrue that actively managed funds are uncorrelated with the market. What is true is that selection bias makes it seem like they are since when interest rates rise and markets go through a down swing, the majority (and yes I mean more than 50%) of hedge funds go out of business. As such the only hedge funds that remain are the ones that happened to weather the storm so to speak.
I want to agree with you, except that almost all of the salescritters for these products promote them as "beating the market." They _have_ to sell them this way because if their customers had any idea what the whole-market returns actually were, they wouldn't pay extra for the privilege of a far riskier (and lower-performing, on average) investment.
And the S&P 500 returns more like 10% per year. A bit higher if you cherry-pick your start and stop dates. I've only seen people use 7% for portfolio value estimation purposes, after adjusting for an assumed 3% inflation.
Those returns depend on when you invest. The inflation adjusted annualized return of the S&P 500 was negative from January 2000 to January 2013 at -0.25%. The inflation adjusted total annual return from January 2000 to January 2024 was 4.5%.
The figure till 2013 was just food for thought. Inflation adjusted returns for the S&P 500 for the last 50 years are around 7-8%. I'm certainly not suggesting anyone stay out of a S&P 500 index fund, as I wouldn't take that advice myself. However, the return from 2000 to 2024 is not a cherry pick for anyone old enough to have had their money invested back in 2000, as it shows that there has only been a 4.5% real return on the money then invested since the 2000 peak.
Well then you could establish a simiar pay critera that beats the s&p 500 during recessionary moves of the index. Im guessing you wouldn't get many takers
No, it is likely the rate of return. There is generally no such mention of inflation in investment returns. The alternative to investing your dollar is to put it in a treasury (inflation tracked), so you can compare the value of your money against that as the lowest risk (the US defaulting) vs. other forms of risk.
The average return of the S&P 500 is around 10%, although you will see people use 7% as a shortcut to account for inflation when estimating the future value of their portfolios.
The citation of 7% as the true return isn't a "shortcut", though a nominal return of 10% could be argued to be, but an acknowledgement that total returns are not real without accounting for inflation. If an hypothetical index in a developing country rises by 50%, but inflation is 100%, then even though the nominal index returns may look impressive, it has actually had a negative real return, as the real inflation-adjusted value has decreased. The use of nominal terms for market returns is money illusion.
For the 50 year period from January 1974 to January 2024, the annualized inflation adjusted real return of the S&P 500 has been 7.04%, which is not a shortcut, but simply correct. The nominal annualized total return has been 11.14%, but it is an illusory return of value without being inflation adjusted.
On average, the S&P500 has returned about 7% annually. If I had a strategy that returned 5% on average but was totally uncorrelated with the S&P, then you'd get the best overall long-term returns (maximize the geometric average of annual returns) by investing in a combination of my strategy and the S&P.