5 ms·

It's slightly different when you get into the range of millions and billions of dollars. If you're investing 100,000, you're better off with an indexed mutual f

by Kluny 9y ago

It's slightly different when you get into the range of millions and billions of dollars. If you're investing 100,000, you're better off with an indexed mutual fund that charges .03%. If these funds can consistently return 10%, that is actually better than what index funds can get you, which is more like 7% on average over the course of decades, but with a lot of year-to-year variation. But then the expense ratio is 3.6% so the hedge fund clients only get 6.4%... but if that's consistent, it's a pretty decent return.

losvedir 9y ago
> If these funds can consistently return 10% Well, yeah, that's the point, isn't it? I thought these funds can't.
- JumpCrisscross 9y ago
  Some of them can, have and do (e.g. Point72, Renaissance, Soros, et cetera). This extends to many more funds [1]. Furthermore, some institutions (e.g. Yale) are consistently good at picking those funds [2]. The average hedge fund seems to eat all its excess returns in fees. But around a third of all hedge funds, mostly upstarts, die in the first few years [3]. By analogy, if you can understand that Kleiner and Google create excess returns while most VC funds do not, you can understand why a similar exponential dynamic is at play with hedge funds. [1] http://www.investmentreview.com/files/2009/12/18-241.pdf http://www.investmentreview.com/files/2009/12/18-241.pdf [2] http://m.pionline.com/article/20141222/PRINT/312229982/big-public-pension-funds-hedge-fund-portfolios-outperform-their-indexes http://m.pionline.com/article/20141222/PRINT/312229982/big-p... [3] https://www.forbes.com/forbes/welcome/?toURL=https://www.forbes.com/sites/katinastefanova/2015/04/25/the-looming-talent-crisis-are-hedge-funds-due-for-a-wake-up-call/&refURL=&referrer= https://www.forbes.com/forbes/welcome/?toURL=https://www.for...
  - dsacco 9y ago
    Great response. I personally agree with Point72 but avoid using them as an example. In my experience it attracts the argument that their returns are illegitimate due to illegal insider trading, which draws the focus away from others like RenTec and Soros.
  - deleted 9y ago
    [deleted]
JoshuaEddy 9y ago
Warren Buffett put his money where his mouth is: he won his $1m wager on the S&P 500 beating a basket of hedge funds over 10 years. And he won despite buying the S&P right before the great recession -- you'd think the hedge funds would have thrived in that market crash by "hedging". It's one more proof point that the vast majority of hedge funds are more risky than justified by returns, regardless of the amount.
- dsacco 9y ago
  The salient caveat here is that Buffett's bet was against "fund of funds", not individual hedge funds. I would have happily taken the other side of that bet if it was about individual funds and I was allowed to choose them (Buffett also would have lost in that case, but to be fair it would be a fundamentally different claim to bet on). I'd make such a bet even today. I don't disagree that most hedge funds are poor investment vehicles, but that's the nature of active investing. If the majority of hedge/mutual funds underperform the market, and you choose to invest in a fund of funds (essentially an index of their net performance), it doesn't really take a $1M bet to see who is going to lose. I don't think Buffett would take a bet he didn't feel extremely confident about winning, but Ted Seides was just foolish. The only rational reason I can see for taking the other side of the bet given its terms was to generate publicity for himself and his own fund at the expense of some reputation a decade down the line. If he profited from that, I guess it was worth it for him. I really can't imagine he seriously believed he'd win.
  - gmarx 9y ago
    This strikes me as typical gambler mentality. I'd definitely bet against you. I saw your post above about skill and I agree there are people who have better skills at this. The problem is they are operating against a chaotic system. Their way of doing things may get huge returns consistently...until it doesn't.
    - leeleelee 9y ago
      This is 110% true: "Their way of doing things may get huge returns consistently...until it doesn't." And most people will never fully understand that until it happens to them. Then you have this eye opening moment, and you understand.

by Kluny 9y ago

losvedir 9y ago

> If these funds can consistently return 10% Well, yeah, that's the point, isn't it? I thought these funds can't.

JumpCrisscross 9y ago
Some of them can, have and do (e.g. Point72, Renaissance, Soros, et cetera). This extends to many more funds [1]. Furthermore, some institutions (e.g. Yale) are consistently good at picking those funds [2]. The average hedge fund seems to eat all its excess returns in fees. But around a third of all hedge funds, mostly upstarts, die in the first few years [3]. By analogy, if you can understand that Kleiner and Google create excess returns while most VC funds do not, you can understand why a similar exponential dynamic is at play with hedge funds. [1] http://www.investmentreview.com/files/2009/12/18-241.pdf http://www.investmentreview.com/files/2009/12/18-241.pdf [2] http://m.pionline.com/article/20141222/PRINT/312229982/big-public-pension-funds-hedge-fund-portfolios-outperform-their-indexes http://m.pionline.com/article/20141222/PRINT/312229982/big-p... [3] https://www.forbes.com/forbes/welcome/?toURL=https://www.forbes.com/sites/katinastefanova/2015/04/25/the-looming-talent-crisis-are-hedge-funds-due-for-a-wake-up-call/&refURL=&referrer= https://www.forbes.com/forbes/welcome/?toURL=https://www.for...
- dsacco 9y ago
  Great response. I personally agree with Point72 but avoid using them as an example. In my experience it attracts the argument that their returns are illegitimate due to illegal insider trading, which draws the focus away from others like RenTec and Soros.
- deleted 9y ago
  [deleted]

JoshuaEddy 9y ago

Warren Buffett put his money where his mouth is: he won his $1m wager on the S&P 500 beating a basket of hedge funds over 10 years. And he won despite buying the S&P right before the great recession -- you'd think the hedge funds would have thrived in that market crash by "hedging". It's one more proof point that the vast majority of hedge funds are more risky than justified by returns, regardless of the amount.

dsacco 9y ago
The salient caveat here is that Buffett's bet was against "fund of funds", not individual hedge funds. I would have happily taken the other side of that bet if it was about individual funds and I was allowed to choose them (Buffett also would have lost in that case, but to be fair it would be a fundamentally different claim to bet on). I'd make such a bet even today. I don't disagree that most hedge funds are poor investment vehicles, but that's the nature of active investing. If the majority of hedge/mutual funds underperform the market, and you choose to invest in a fund of funds (essentially an index of their net performance), it doesn't really take a $1M bet to see who is going to lose. I don't think Buffett would take a bet he didn't feel extremely confident about winning, but Ted Seides was just foolish. The only rational reason I can see for taking the other side of the bet given its terms was to generate publicity for himself and his own fund at the expense of some reputation a decade down the line. If he profited from that, I guess it was worth it for him. I really can't imagine he seriously believed he'd win.
- gmarx 9y ago
  This strikes me as typical gambler mentality. I'd definitely bet against you. I saw your post above about skill and I agree there are people who have better skills at this. The problem is they are operating against a chaotic system. Their way of doing things may get huge returns consistently...until it doesn't.
  - leeleelee 9y ago
    This is 110% true: "Their way of doing things may get huge returns consistently...until it doesn't." And most people will never fully understand that until it happens to them. Then you have this eye opening moment, and you understand.