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> You have to consider risk. The question is: OK, you account for risk, now what? You can manage risk by tempering an all-stock portfolio with bonds, lowering

> You have to consider risk. The question is: OK, you account for risk, now what? You can manage risk by tempering an all-stock portfolio with bonds, lowering volatility. Why pick high-cost hedge funds over that option? > Throw them all together in a pot and all the spice is gone. Except if you look at the breakdown, any one of those sub-funds did poorly. None beat the S&P. > Plenty of individual funds did beat the S&P But how is an investor to know in advance? Also: winning funds tend to rotate around - can't use past performance as a reasonable guide to pick a fund going forward. > You have to wonder how the bet would have fared had we not experienced the unprecedented reaction of central banks to the crisis. You can always argue this time was different, but the reality is we had roughly 7% average returns on the S&P over the course of the bet, which is pretty typical. It wasn't just some short period, either - for nine out of the ten years the S&P won the bet against the group. > You can find long periods in the past where the S&P was sideways. Which is why a smart portfolio is three-fund, covering global stocks and bonds. A portfolio of that makeup does not tend to travel sideways for long periods like the US market can alone. Take for instance 2000 to 2010, in which US stocks did go sideways - bonds and international stocks compensated for that. At the end of the day, instead of excuses/explanations (no offense intended) I'd like to see you make a case for who should be using hedge funds and why.

johnnyb9 9y ago
What about the fact that certain strategies can only be invested in but for hedge funds?
- rhizome 9y ago
  Returning to the topic of the thread, are you referring to winning strategies?
  - deleted 9y ago
    [deleted]
Veratyr 9y ago
> The question is: OK, you account for risk, now what? You can manage risk by tempering an all-stock portfolio with bonds, lowering volatility. Why pick high-cost hedge funds over that option? I think his point is that hedge funds may have higher risk-adjusted returns than the S&P 500, despite lower absolute returns. For (ridiculously unrealistic) example, say you have an average 7%/yr return on the S&P 500 with volatility of ~14% and a hedge fund with a 5%/yr return but volatility of ~1%. At the end of the time period, a fixed $1M investment is clearly going to come ahead on the S&P 500 but the hedge fund is clearly the better fund, as matched for volatility (through leverage) with the S&P 500, the returns would be 70%/yr. You'd pick the hedge fund because matched for volatility (through leverage or bonds or what have you), the hedge fund performs better.
- misnamed 9y ago
  It's theoretically possible but I'll believe it's actually possible when I see it. I don't see volatility data in the linked article, but if they released it somewhere we could perhaps model a stock/bond portfolio of comparable volatility and see how they did. I would be willing to bet the stock/bond approach would win on a risk-adjusted basis, but can't say without data. Meanwhile, though, a generic vanilla Total Bond market index fund over the past 10 years returned 4.3% annually. A $100,000 investment would have turned into over $150,000 over the course of the bet, higher than the hedge fund collection. So the hedge funds would have to have less volatility than a very steady intermediate-duration bond fund, which, incidentally, had far lower draw-downs in its worst years. So at the very least, in plain language, if 'big drops' are a measure of risk, then the hedge fund set was riskier than bonds and still lost to bonds.

johnnyb9 9y ago

What about the fact that certain strategies can only be invested in but for hedge funds?

rhizome 9y ago
Returning to the topic of the thread, are you referring to winning strategies?
- deleted 9y ago
  [deleted]

Veratyr 9y ago

> The question is: OK, you account for risk, now what? You can manage risk by tempering an all-stock portfolio with bonds, lowering volatility. Why pick high-cost hedge funds over that option? I think his point is that hedge funds may have higher risk-adjusted returns than the S&P 500, despite lower absolute returns. For (ridiculously unrealistic) example, say you have an average 7%/yr return on the S&P 500 with volatility of ~14% and a hedge fund with a 5%/yr return but volatility of ~1%. At the end of the time period, a fixed $1M investment is clearly going to come ahead on the S&P 500 but the hedge fund is clearly the better fund, as matched for volatility (through leverage) with the S&P 500, the returns would be 70%/yr. You'd pick the hedge fund because matched for volatility (through leverage or bonds or what have you), the hedge fund performs better.

misnamed 9y ago
It's theoretically possible but I'll believe it's actually possible when I see it. I don't see volatility data in the linked article, but if they released it somewhere we could perhaps model a stock/bond portfolio of comparable volatility and see how they did. I would be willing to bet the stock/bond approach would win on a risk-adjusted basis, but can't say without data. Meanwhile, though, a generic vanilla Total Bond market index fund over the past 10 years returned 4.3% annually. A $100,000 investment would have turned into over $150,000 over the course of the bet, higher than the hedge fund collection. So the hedge funds would have to have less volatility than a very steady intermediate-duration bond fund, which, incidentally, had far lower draw-downs in its worst years. So at the very least, in plain language, if 'big drops' are a measure of risk, then the hedge fund set was riskier than bonds and still lost to bonds.