6 ms·

It’s amazing that people with that kind of money would be persuaded into paying millions in fees thinking they can beat the index.

mruts 7y ago
What is "the index?" The S&P 500? The FTSE 250? The Nikkei? The Russell 2000? The Russel 3000? The risk-free rate? LIBOR? When you make statements like this, they mean nothing at all. Let's say you're talking about the S&P 500. Many hedge funds have been beating it for 20 years or more. But let's say you had 2 Billion dollars. What would you do with it? Are you telling me you would put it all in one index fund? Maybe you would put it in a couple, maybe you would put it in some bonds? Well guess what, you just made an active management decision! You decided what index, or what bonds, or whatever. There is no such thing as passive management.
- hammock 7y ago
  Where do you put your money and has your portfolio beat the S&P 500 over the last 10 years?
- cubano 7y ago
  According to Vanguard, over 85% of actively traded funds don't beat the S&P 500, and it's quite possible the one's that do are simply lucky, as in any random distribution there will be a small percentage, of course, that are over 2SD on the profit side. 2bil is so easy. Highly rated tax-free munibonds...a very safe 3% coupon will net you completely tax-free 60mil/yr...I would say plenty to live off of and even reinvest.
  - kurtisc 7y ago
    So 'the index' is S&P 500? What about Nikkei 225, how many beat that?
- soVeryTired 7y ago
  > Many hedge funds have been beating it for 20 years or more Relatively few, I would say, if you measure it by realised Sharpe. Rentech, Brevan Howard, D.E. Shaw, and maybe AHL and Winton excluding the past few years. I'm struggling to name others that have done well over a sustained period. There are a lot of funds out there, and IMO much of the supposed 'outperformance' is a combination of leverage and survivor bias (I say this as a former hedge fund quant).
  - motohagiography 7y ago
    I remember reading an Andrew Lo quote back in 2007-8 where he said something along the lines of there at the time being about 9000 hedge funds in operation at last count, and for comparison, there were about 7000 Taco Bell franchises. Given that sample size of funds, possible returns, and any distribution you want to fit into it, your odds may be better at a roulette table.
  - mruts 7y ago
    2 Sigma and Bridgewater due pretty well for themselves Sharpe ratio-wise. Also if we're talking about market makers, Jane Street, Susquehanna, Fortress, and Citadel very well for themselves.
    - soVeryTired 7y ago
      Huh. I hadn't realised that two sigma were that old. My point still stands though. Market making is a different kettle of fish in the sense that it's more of a financial service than a directional bet on markets. It's also much less capital intensive so there's less pressure to raise money from clients. As a market-maker, you can certainly find yourself on the wrong side of a trade, but generally the goal is to be as market-neutral as possible.
      - mruts 7y ago
        I mean, the goal of absolute return hedge funds is pretty much the same: only have exposure to alpha factors. With market makers it’s pretty much the same thing: only have exposure to order flow. That’s the alpha. I’ve worked as a quant at both hedge funds and market makers, and both have a similar philosophy of a only getting exposure to “alpha”, though the means and capital required (as you mentioned) are quite different. I think a concept of Sharpe ratio still applies to both though, with market making having an clearly higher one. Personally, I’ve found working for a hedge fund a lot better, market making is kind of a drab business when you get down to the nuts and bolts.
- intuitionist 7y ago
  There is such a thing as low-fee management, though, and that’s really what investors care about. Nobody offers the actual Sharpe portfolio (how could they?) but you can get your choice of approximation for a handful of basis points.
  - mruts 7y ago
    Some investors care about returns. Some care about Sharpe ratio. But investors only care about low-fees when they underperform their benchmark net of fees.
- mrhappyunhappy 7y ago
  Sorry should have made it clear was referring to index in the article S&P 500. And no, most hedge funds can’t even match it. Once you figure in the fees they actually make less money for their clients. It’s known facts, look at historical returns. Sure, there are some that do much better for 15 years and then lose most of the extra wins in one year, still figure in the fees for investor and it’s never worth it. You have better odds at the roulette table just doing your own gambling. I recommend “Common Sense on Mutual Funds” by John C. Bogle on this topic.

mruts 7y ago

What is "the index?" The S&P 500? The FTSE 250? The Nikkei? The Russell 2000? The Russel 3000? The risk-free rate? LIBOR? When you make statements like this, they mean nothing at all. Let's say you're talking about the S&P 500. Many hedge funds have been beating it for 20 years or more. But let's say you had 2 Billion dollars. What would you do with it? Are you telling me you would put it all in one index fund? Maybe you would put it in a couple, maybe you would put it in some bonds? Well guess what, you just made an active management decision! You decided what index, or what bonds, or whatever. There is no such thing as passive management.

hammock 7y ago
Where do you put your money and has your portfolio beat the S&P 500 over the last 10 years?
cubano 7y ago
According to Vanguard, over 85% of actively traded funds don't beat the S&P 500, and it's quite possible the one's that do are simply lucky, as in any random distribution there will be a small percentage, of course, that are over 2SD on the profit side. 2bil is so easy. Highly rated tax-free munibonds...a very safe 3% coupon will net you completely tax-free 60mil/yr...I would say plenty to live off of and even reinvest.
- kurtisc 7y ago
  So 'the index' is S&P 500? What about Nikkei 225, how many beat that?
soVeryTired 7y ago
> Many hedge funds have been beating it for 20 years or more Relatively few, I would say, if you measure it by realised Sharpe. Rentech, Brevan Howard, D.E. Shaw, and maybe AHL and Winton excluding the past few years. I'm struggling to name others that have done well over a sustained period. There are a lot of funds out there, and IMO much of the supposed 'outperformance' is a combination of leverage and survivor bias (I say this as a former hedge fund quant).
- motohagiography 7y ago
  I remember reading an Andrew Lo quote back in 2007-8 where he said something along the lines of there at the time being about 9000 hedge funds in operation at last count, and for comparison, there were about 7000 Taco Bell franchises. Given that sample size of funds, possible returns, and any distribution you want to fit into it, your odds may be better at a roulette table.
- mruts 7y ago
  2 Sigma and Bridgewater due pretty well for themselves Sharpe ratio-wise. Also if we're talking about market makers, Jane Street, Susquehanna, Fortress, and Citadel very well for themselves.
  - soVeryTired 7y ago
    Huh. I hadn't realised that two sigma were that old. My point still stands though. Market making is a different kettle of fish in the sense that it's more of a financial service than a directional bet on markets. It's also much less capital intensive so there's less pressure to raise money from clients. As a market-maker, you can certainly find yourself on the wrong side of a trade, but generally the goal is to be as market-neutral as possible.
    - mruts 7y ago
      I mean, the goal of absolute return hedge funds is pretty much the same: only have exposure to alpha factors. With market makers it’s pretty much the same thing: only have exposure to order flow. That’s the alpha. I’ve worked as a quant at both hedge funds and market makers, and both have a similar philosophy of a only getting exposure to “alpha”, though the means and capital required (as you mentioned) are quite different. I think a concept of Sharpe ratio still applies to both though, with market making having an clearly higher one. Personally, I’ve found working for a hedge fund a lot better, market making is kind of a drab business when you get down to the nuts and bolts.
intuitionist 7y ago
There is such a thing as low-fee management, though, and that’s really what investors care about. Nobody offers the actual Sharpe portfolio (how could they?) but you can get your choice of approximation for a handful of basis points.
- mruts 7y ago
  Some investors care about returns. Some care about Sharpe ratio. But investors only care about low-fees when they underperform their benchmark net of fees.
mrhappyunhappy 7y ago
Sorry should have made it clear was referring to index in the article S&P 500. And no, most hedge funds can’t even match it. Once you figure in the fees they actually make less money for their clients. It’s known facts, look at historical returns. Sure, there are some that do much better for 15 years and then lose most of the extra wins in one year, still figure in the fees for investor and it’s never worth it. You have better odds at the roulette table just doing your own gambling. I recommend “Common Sense on Mutual Funds” by John C. Bogle on this topic.