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This is the danger of only considering averages. Everyone on the passive side gets whatever return the market dictates. In a bad/recession year, this could be l

This is the danger of only considering averages. Everyone on the passive side gets whatever return the market dictates. In a bad/recession year, this could be largely negative. They are not hedged against business cycle downturns. Different individuals on the active side have wildly differing returns. The guy who invests in the hedge fund with 200% returns doesn't care about the 20, 2 fee structure he has to pay on his investment because he's made so much more than the passive guys. There will be large losers and large winners, but you have to pay table stakes (fees) to play and have your shot at winning those big returns. Buffet is talking his book - a hugely diversified portfolio that basically represents and relies on the strength and growth of the American economy, as well as US government-mandated oligopolies like insurance.

matt_wulfeck 10y ago
I hear this mentioned "hedge funds are for downturns" but why is it that hedges were getting demolished going into 2016? If they really do better in downturns then I would have expected better performance from hedge funds as a whole.
- roymurdock 10y ago
  The term "hedge fund" doesn't really mean anything anymore. It's just an actively managed portfolio with a lower AUM on average than a mutual fund, the legal option to take on more risk, and a certain fee structure. There are a few main investing "disciplines" or "strategies" [1] that each fund manager tends to subscribe to, but it's impossible to talk about them intelligently as a group as they all make wildly diverse bets on different assets across the globe. [1] See figure 3: https://wealth.barclays.com/wealth-management/en_us/home/thought-leadership/Compass/compass-may-15/is-there-a-case-for-hedge-funds.html https://wealth.barclays.com/wealth-management/en_us/home/tho...
JamilD 10y ago
> In a bad/recession year, this could be largely negative. They are not hedged against business cycle downturns. This was the argument made by Protege Partners, when betting against Buffett in the great "index funds vs hedge funds" long bet [0]. It turns out that the index funds fared better — and they're mainly used for long-term investment, where the short-term macroeconomic ebbs don't have an impact on the overall return. Of course the variance on the active side will be higher, but there are as many losers as they are winners, and much of it is due to simple randomness. Unless you're confident that you know more than other investors (for many people, including myself, we probably don't [1]), index funds, or "hugely diversified portfolios" are the way to go. Basically, no hedge fund is making those 200% returns you're speaking of, and even if some fund were, empirically it's more likely to be just noise. Look at the result so far of Buffett's bet on hedge funds. It speaks volumes. [0] http://longbets.org/362/ http://longbets.org/362/ [1] https://en.m.wikipedia.org/wiki/Dunning%E2%80%93Kruger_effect https://en.m.wikipedia.org/wiki/Dunning%E2%80%93Kruger_effec...
- roymurdock 10y ago
  I'm not trying to give investment advice, just explaining why you should be somewhat credulous about any sales pitch from a guy with vested interests in where you should put your money. It's not as simple as Buffett makes it seem.
  - hueving 10y ago
    Buffets position is also backed by reality. On average, managed money will do worse because of the fees. The people making outsized returns are the minority. It's like going into a casino and arguing that the casino is losing because you see one guy hit a jackpot on the slot machine.
    - roymurdock 10y ago
      Again, I'm not advocating for one strategy over another, just pointing out that Buffett's explanation is simplistic and that it is worth considering metrics other than average returns.
      - 0xEFF 10y ago
        I mentioned this above, but I think you're missing the point. For what you suggest to be worth considering, you have to believe you're something other than an average investor. But you aren't. That's who he was speaking to and speaking about. Average investors.
        soared 10y ago
        Hes not arguing managed makes more money, just that within hedge funds there is variation, where there is no variation within index. The both have the same avg, but wildly different max/min/etc
  - 0xEFF 10y ago
    > It's not as simple as Buffett makes it seem. Yes, actually, it is. That's the whole point.

matt_wulfeck 10y ago

I hear this mentioned "hedge funds are for downturns" but why is it that hedges were getting demolished going into 2016? If they really do better in downturns then I would have expected better performance from hedge funds as a whole.

roymurdock 10y ago
The term "hedge fund" doesn't really mean anything anymore. It's just an actively managed portfolio with a lower AUM on average than a mutual fund, the legal option to take on more risk, and a certain fee structure. There are a few main investing "disciplines" or "strategies" [1] that each fund manager tends to subscribe to, but it's impossible to talk about them intelligently as a group as they all make wildly diverse bets on different assets across the globe. [1] See figure 3: https://wealth.barclays.com/wealth-management/en_us/home/thought-leadership/Compass/compass-may-15/is-there-a-case-for-hedge-funds.html https://wealth.barclays.com/wealth-management/en_us/home/tho...

JamilD 10y ago

> In a bad/recession year, this could be largely negative. They are not hedged against business cycle downturns. This was the argument made by Protege Partners, when betting against Buffett in the great "index funds vs hedge funds" long bet [0]. It turns out that the index funds fared better — and they're mainly used for long-term investment, where the short-term macroeconomic ebbs don't have an impact on the overall return. Of course the variance on the active side will be higher, but there are as many losers as they are winners, and much of it is due to simple randomness. Unless you're confident that you know more than other investors (for many people, including myself, we probably don't [1]), index funds, or "hugely diversified portfolios" are the way to go. Basically, no hedge fund is making those 200% returns you're speaking of, and even if some fund were, empirically it's more likely to be just noise. Look at the result so far of Buffett's bet on hedge funds. It speaks volumes. [0] http://longbets.org/362/ http://longbets.org/362/ [1] https://en.m.wikipedia.org/wiki/Dunning%E2%80%93Kruger_effect https://en.m.wikipedia.org/wiki/Dunning%E2%80%93Kruger_effec...

roymurdock 10y ago
I'm not trying to give investment advice, just explaining why you should be somewhat credulous about any sales pitch from a guy with vested interests in where you should put your money. It's not as simple as Buffett makes it seem.
- hueving 10y ago
  Buffets position is also backed by reality. On average, managed money will do worse because of the fees. The people making outsized returns are the minority. It's like going into a casino and arguing that the casino is losing because you see one guy hit a jackpot on the slot machine.
  - roymurdock 10y ago
    Again, I'm not advocating for one strategy over another, just pointing out that Buffett's explanation is simplistic and that it is worth considering metrics other than average returns.
    - 0xEFF 10y ago
      I mentioned this above, but I think you're missing the point. For what you suggest to be worth considering, you have to believe you're something other than an average investor. But you aren't. That's who he was speaking to and speaking about. Average investors.
      - soared 10y ago
        Hes not arguing managed makes more money, just that within hedge funds there is variation, where there is no variation within index. The both have the same avg, but wildly different max/min/etc
- 0xEFF 10y ago
  > It's not as simple as Buffett makes it seem. Yes, actually, it is. That's the whole point.