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> 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-co

> 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.

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.