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Performance of professionally managed investment funds based on EMH

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Course

Date

Institution
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Table of Contents
Introduction.................................................................................................................................................3
The Efficient Market hypothesis..................................................................................................................3
Variations of the Efficient Markets Hypothesis.......................................................................................5
Arguments in support & Against the EMH.................................................................................................5
Conclusion...............................................................................................................................................6
References...................................................................................................................................................7
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Introduction

Stock Market agreeably a phenomenon that is difficult to predict with significant certainty and

that it is a complex subject to digest it enough that it gives comprehensive information about the

markets and listed stock in the context of Efficient market Hypothesis (EMH). The performance

of investment funds and respective returns from the viewpoint of the hypothesis are directly

based on the dynamics of the stock exchange indices of the listed securities. The EMH holds that

the prices of securities at all-time predicts all the possibly accessible and available information

depending on the wide range of aspects and factors including disclosure of the company and the

regulatory and policy frameworks. The purpose of this paper is to explore the concept of

performance of professionally managed investment funds in the context of EMH, citing the

significant and relevant empirical evidence.

The Efficient Market hypothesis

The Efficient Markets Hypothesis (EMH) theory is basically an investment theory borrowed

from the concepts presented by Eugene Fama (1970) in their research, “Efficient Capital

Markets: A Review of Theory and Empirical Work.” The researcher hypothesized that making

investment returns that do outperform the averages overly across the markets as shown by major

stock indices is virtually impossible in a quite consistent trend (Malkiel., 2005). According to the

EMH while the performance of investment funds may emerge lucky enough and fetch high

returns in the short run, it is almost impossible to achieve higher investment returns exceeding

the market average in the long run.

The theoretical premise of EMH is that when new data and information is released into the

market, the reflection is immediately mirrored through the performance of the financial
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investment prices in the stock market—neither fundamental nor technical analysis has the

capability to help the investor to get insights into how to earn higher returns exceeding those of

randomly selected stock portfolio. Despite the wide range of empirical evidence in support of

these theoretical bases of the EMH, there are also a number of critics challenging the theory on

the basis of evidence available illustrating predictable patterns associated with the performance

of investment funds in the stock market (Ying, Yousaf, Akhtar & Rasheed., 2019). One line of

though hold that combine fundamental and technical methods of analyses are predictive of

performance in the stock market. Another line of though is in the behavioral finance alluding to

the notion that investors are guided by psychological aspects rather than efficiency and

rationality. The third line of though supposes that from fundamental analysis perspectives,

various valuation ratios are reliable when predicting the performance of investment funds in the

stock market in future periods.

Performance of professionally managed investment funds in context of EMH

A wide range of research studies have found that investment funds in the context of the EMH do

not certainly earn higher net returns compared to randomly picked investment in a large pool of

holding securities—that is before and after sales expenses respectively. Additionally, investment

funds do not fetch higher gross returns than those that are associated with the native buy and

hold approach. These are evidenced because of the nature of challenges associated with the use

of fundamental analysis in a continuous and consistent manner to many securities in a market

considered to be efficient, and also because of diverse market portfolio. Thus, there is therefore

sufficient empirical evidence supporting the prediction of the performance of investment funds in

view of EMH. Empirical evidence presented in Kozlovsky et al., (2020) agree with the joint

hypothesis conducted by supposing that investment funds managers do not have the capacity to
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credibly and certainly predict the performance—essentially, these notions are in favor of low risk

investment.

Variations of the Efficient Markets Hypothesis

In the context of EMH, there are three variations associated with the theory (Singh & Yadav.,

2021); the strong, the semi-strong, and the weak forms—all representing three different

assumptions of the prediction of performance of investment funds in an efficient market. The

weak form of the EHM is premised on the assumption that the security prices mirror the publicly

available market data and information, even though it may not necessarily reflect new updated

information that has not been released into the public. This form significantly refutes the

technical strategies. On the other hand, the semi strong or medium refutes both the technical and

fundamental evaluation analysis techniques in predicting investment fund performance in the

stock market. Lastly, the strong form suggests that the performance is determined by both public

and private information.

Arguments in support & Against the EMH

Proponents and opponents of the EMH may both present their opinion case views. Proponents

including Singh, Babshetti and Shivaprasad (2021) argue their concretized case premised on the

logics and principles of the theory or on a wide range of studies that are in support of the notions.

A study on long term basis conducted by Peón, Antelo and Calvo (2019) showed that in a

span of more than a decade, the only forms of professionally managed investment funds that

were reported to outperform the index funds to a significant extent were small growth funds in

the US and funds in the emerging markets. Findings obtained from other studies showed that less

than 50% of even the best and top rated active professional investment fund managers showed
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capacities of outperforming the index funds consistently. Noteworthy, huge sums of money are

invested on the professional fund managers by organizations hoping that they will help generate

higher returns above the market returns on average.

On the contrary view the opponents of the EMH present their case arguing that there are

investors and traders who are actually capable of consistently generating higher returns

exceeding the average market performance. This should be impossible based on the principles of

the EMH, except by luck. The limitation of this notion however that is it cannot explain the

consistent prediction of performance over time outperforming the market by considerably large

margin. Besides, the opponents of the theory posit that sometimes in the event pessimism or

optimism prevailing in the markets push prices to high or low levels indicate that it is not true to

believe that they usually trade at their fair value in the market.

Conclusion

It is a complex exercise to certainly predict the dynamics of the investment funds performance

from view of the EMH. There is however sufficient evidence suggesting that the hypothesis

holds, despite the inconsistencies and variations associated with it. Professional investment fund

managers play a major role, but they also cannot certainly predict the performance in the stock

market. Justifiably the various viewpoints depend on the market dynamics and other aspects that

affect the operations in the market.

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References

Kozlovsky, A., Bilenko, D., Kozlovskyi, S., Lavrov, R., Skydan, O., & Ivanyuta, N. (2020,

September). Determination of the risk-free rate of return on an investment efficiency

based on the fractal markets hypothesis. In Forum Scientiae Oeconomia (Vol. 8, No. 3,

pp. 61-72).

Malkiel, B. G. (2005). Reflections on the efficient market hypothesis: 30 years later. Financial

review, 40(1), 1-9.

Peón, D., Antelo, M., & Calvo, A. (2019). A guide on empirical tests of the EMH. Review of

Accounting and Finance.

Singh, J. E., Babshetti, V., & Shivaprasad, H. N. (2021). Efficient Market Hypothesis to

Behavioral Finance: A Review of Rationality to Irrationality. Materials Today:

Proceedings.

Singh, S., & Yadav, S. S. (2021). Market Efficiency. In Security Analysis and Portfolio

Management (pp. 237-253). Springer, Singapore.

Ying, Q., Yousaf, T., Akhtar, Y., & Rasheed, M. S. (2019). Stock investment and excess returns:

a critical review in the light of the efficient market hypothesis. Journal of Risk and

Financial Management, 12(2), 97.