Leon Cooperman is one smart guy.  According to a recent article in the New York Times, Mr. Cooperman was one of the “early standard bearers of the hedge fund industry.”

He runs a number of hedge funds through his firm, Omega Advisors.  Omega manages over $3.5 billion and has 35 employees.

Mr. Cooperman has decided to close down his funds, return money to investors and convert his firm into a family office by the end of they year.

Cooperman is reported to have a personal net worth of $3.2 billion.

What are the lessons to be learned from Cooperman’s decision?

Wrong benchmark

Cooperman’s main fund has returned 12.5% annually since inception in 1991, outperforming the S&P 500 index by “about three percentage points annually.”  At first blush, that’s an impressive track record.

The issue is whether the S&P 500 index is the right benchmark against which the performance of Cooperman’s fund should be measured.  I have no idea if it is or isn’t.

However, there’s ample reason for investors to be skeptical.  Significant research (summarized here) has found many actively managed funds use a benchmark that  “…on average is easier to outperform compared to the benchmark implied by their holdings.”

If a fund uses a benchmark that understates risk, it’s fairly easy (but deceptive) to overstate performance.

Daunting odds

What are the odds of an actively managed fund beating an appropriate benchmark?  A seminal study found only about 2% are able to outperform the correct benchmark than would be expected by chance.  And that’s before taxes.

Cooperman may well be in this rarified class of active managers with genuine skill.  You and your broker are probably not.

You should throw in the towel and give up on the possibility of trying to “beat the market.”  The odds against you are just too daunting.

Resource of the week

This article by Larry Swedroe discuss a common practice of active managers in using incorrect benchmark against which they measure the performance of funds they manage.