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Hedge funds make perfect sense for people who want to hedge their capital in specific ways. A hedge fund doesn't need to outperform the market to deliver tremen
by gizmo 10y ago
Hedge funds make perfect sense for people who want to hedge their capital in specific ways. A hedge fund doesn't need to outperform the market to deliver tremendous value to their customers.
Secondly, every trade has a counterparty. So somebody necessarily has to be at the loser's end of every trade. For every investment fund that makes oversize profits another fund loses money. It all evens out. That doesn't mean it's entirely zero sum, though, because money still flows from bad businesses towards good businesses as a result. The incentives for professional money managers are also totally misaligned: funds performance is reported quarterly leading to a short term bias; fund managers get a bonus if they invest irresponsibly but get lucky; customers are unsophisticated so it's one big lemon market.
I agree that index funds make a lot of sense for non-millionaires (and single digit millionaires), but that's simply because it takes a lot of effort to beat the market even by a few percent so you need a lot of assets for it to be worthwhile.
- pshc 10y agoWith regard to your first sentence, could you give an example of a specific way to hedge capital? I'm not sure I understand.
- gizmo 10y agoSuppose you're a business with a lot of positive cash flow, but you also have a lot of exposure to the USD-MXN exchange rate. Maybe you have factories in Mexico but sell to the US, it doesn't matter. In that case you can pay a hedge fund to hedge your money so that if the exchange rate collapses you make enough money on the stock market to compensate, so your business will survive until the exchange rate climbs back. Most businesses have very high exposure to one section of the market, so wanting to hedge is natural. If your business makes toilet paper you have it easy because no matter what happens demand for your product won't collapse overnight. If you make cars then economic recessions are scary because new car sales will drop like a brick, and you need to hedge.
- lotsofpulp 10y ago>If your business makes toilet paper you have it easy because no matter what happens demand for your product won't collapse overnight. Until people figure out the magic of bidets! https://www.amazon.com/Luxe-Bidet-Neo-120-Non-Electric/dp/B00A0RHSJO https://www.amazon.com/Luxe-Bidet-Neo-120-Non-Electric/dp/B0...
- mrfusion 10y agoYou still need some paper right?
- stagbeetle 10y agoThey have a built-in dryer.
- loeg 10y agoAn order of magnitude less, I think.
- pg314 10y agoMost hedge funds have very little to do with the kind of hedging you describe. If you had that kind of exposure to currency risks, you wouldn't go to a hedge fund. You can easily hedge that risk yourself with futures or options. If you wanted to pay somebody for it, you would go to your banker and he would do it for you for a fraction of the 2/20 fees charged by hedge funds.
- gizmo 10y agoThe average banker has no idea how to hedge any serious amount of money, nor does the average banker understand what kind of hedging strategy is appropriate for a business. Nothing about hedging with futures or options is easy. Also, hedge funds don't charge 2/20 anymore like in the good old days.
- tptacek 10y ago
- philipov 10y ago> That doesn't mean it's entirely zero sum, though, because money still flows from bad businesses towards good businesses as a result. Buffet's point is that it's negative-sum. A gambler might win today, but lose tomorrow, and his counterparty will get the opposite, but the house wins on every transaction. While the players churn, the market makers and rent seekers will drain the system of money, in aggregate.
- gizmo 10y agoYou're reading it incorrectly. Buffett is making the claim that people have "waste[d] more than $100 billion over the past decade" looking for superior investment returns. That's his claim, no more. And I agree. There wouldn't be a stock market if everybody just invests in a fortune 500 index fund. The benefit to society of a functioning stock market is way more than $10B/yr.
- pg314 10y agoNo, he isn't reading it incorrectly. Buffett is claiming that on aggregate, because of the fees, the passive investors will be better off than the active investors. From page 23: A lot of very smart people set out to do better than average in securities markets. Call them active investors. Their opposites, passive investors, will by definition do about average. In aggregate their positions will more or less approximate those of an index fund. Therefore, the balance of the universe—the active investors—must do about average as well. However, these investors will incur far greater costs. So, on balance, their aggregate results after these costs will be worse than those of the passive investors.
- gizmo 10y agoYes, but Buffett is not claiming that active investing (as opposed to passive index investing) is negative-sum in aggregate! That would be ludicrous, because Buffett is an active investor himself and the Buffett Annual Report is a long form sales letter to persuade people to buy more Berkshire shares.
- valuearb 10y agoThe vast majority of Hedge funds don't hedge and their investors expect the one thing they can't deliver, outperformance.
- mememachine 10y ago>Secondly, every trade has a counterparty. So somebody necessarily has to be at the loser's end of every trade. This is not true. There will always be someone who wins less between the two, but it doesnt mean it wasnt a win-win trade. Some things are more valuable to one person than another.