Stefan Kühn: The market efficiency hypothesis and the (structural) underperformance of actively managed funds

EQS-Media / 21.12.2023 / 21:54 CET/CEST

In the complex world of finance, the risk-return ratio is a decisive factor in portfolio design. The renowned business economist and economist Stefan Kühn, whose company "SK Coaching" mainly supports listed companies in positioning themselves on the financial market, sheds light on the fundamentals of modern financial theory. With a deep understanding of the market efficiency hypothesis and the challenges of actively managed funds, Kühn explains what these companies should consider if they want to achieve a balanced relationship between risk and return for their investors.
In the financial universe, return and risk play a decisive role in the development of an optimal portfolio. Stefan Kühn emphasises the importance of the risk/return ratio as a central aspect of modern financial theory. "The return alone says little about the optimal composition of a portfolio," explains Kühn. "Rather, it's about finding a balanced relationship between return and risk."
Kühn makes it clear that this relationship is a central conflict of objectives in capital investment, where investors have to weigh up what risk they are prepared to take in order to achieve the desired return. "A higher expected return usually goes hand in hand with a higher risk, and these two variables correlate positively with each other," he emphasises.
The financial expert emphasises that capital market participants, especially asset managers, benefit from the findings of portfolio theory by analysing the trade-off between risk and return before making investment decisions.

Risk, return and the magic triangle of investment
Kühn goes on to explain that investors diversify their investments into portfolios in order to achieve optimal returns while minimising risk. "Every investment is determined by three main criteria: security, liquidity and profitability," he explains.
"Security as a measure of capital preservation is influenced by various risks such as creditworthiness or market fluctuations. Risk diversification can increase security by spreading the capital across different asset classes and countries. Kühn also emphasises the importance of liquidity, which indicates how quickly capital can be converted into cash. "Liquidity increases with time and conversion costs," he explains.
In addition to security and liquidity, profitability plays an important role. Kühn emphasises that profitability is the ratio of income to capital employed. "The difficulty is that different investments generate different returns. Comparability is made possible by the return ratio. Companies that also take sustainability criteria into account therefore have a better chance of being selected by portfolio managers, asset managers and investors.

Conflicts in the magic triangle
The economist points out the conflict between security, liquidity and profitability. "The more security is desired, the lower the return is often. Higher profitability often requires higher risk. There is also a conflict between liquidity and profitability. Investments with high liquidity often have a lower return".
Stefan Kühn emphasises that an optimal portfolio with a balanced risk/return ratio can achieve a better performance than a portfolio with higher risk and higher return. "The Sharpe ratio illustrates this relationship between the return achieved and the risk taken." With his understanding of the fundamentals of modern financial theory and their practical application in portfolio construction, Stefan Kühn demonstrates the key principles that significantly influence investment decisions and portfolio construction.

The expansion of modern finance theory
With his knowledge of modern financial theory, Stefan Kühn, business economist and economist, concentrates on the essential principles and their practical application. With his many years of experience in dealing with macroeconomic change and the interdependence of markets and political influence on companies, society and financial markets, Kühn offers an extended insight into the complex world of financial theory. His thesis that Keynesian and new Keynesian macroeconomic models represent fully interdependent economic systems characterises his holistic approach to financial concepts.

In-depth study of modern finance theory
A deeper understanding of modern finance theory requires an in-depth look at the market efficiency hypothesis and its impact on the performance of actively managed funds. Kühn emphasises that market efficiency plays a central role in the valuation and design of portfolios. "The market efficiency hypothesis is based on the assumption that the market already reflects all available information in prices," he explains. "It is therefore difficult to achieve sustainable excess returns through active management, as prices already contain all the available information."
The economist points out that actively managed funds that try to beat the market often underperform due to costs, fees and the difficulty of consistently outperforming the market. "The structural underperformance of actively managed funds compared to passive investment strategies that simply track the market is a phenomenon that can be derived from the market efficiency hypothesis," he emphasises.

Practical applications in portfolio design
Stefan Kühn emphasises how important it is to put theoretical concepts into practice. "Knowledge of modern financial theory alone is not enough, the decisive factor is how these concepts are applied in the real world," he says. Through a balanced diversification of the portfolio, cost-efficient investment instruments such as index funds or exchange-traded funds (ETFs) and taking tax implications into account, investors can develop a strategy based on the principles of modern financial theory.
In terms of practical implementation, Kühn emphasises the importance of a long-term perspective. "It is crucial that investors analyse their portfolios in the context of their individual goals, time horizons and risk appetite," he explains. The adjustment of theportfolios to changing market conditions and regular monitoring of performance are also
performance are also very important.

In order to remain attractive to investors, companies must take these strategies into account and align their actions accordingly.

Stefan Kühn is an economist and has been studying macroeconomic change and the interdependence of markets and political interventions in companies, society and the money market for several years. He argues that macroeconomic Keynesian and new Keynesian models generally depict completely interdependent economic systems that cannot be solved recursively, but only simultaneously. He does not limit himself to purely scientific methods, but draws his findings from his many years as an entrepreneur and consultant to the management of predominantly listed companies.

Stefan Kühn, Business economist & economist

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