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The smart hedge funds' edge is pervasive but small. And there are a lot of dumb hedge funds! (Also a lot of scheming hedge funds that are fee maximizers, not in
by GCA10 7y ago
The smart hedge funds' edge is pervasive but small. And there are a lot of dumb hedge funds! (Also a lot of scheming hedge funds that are fee maximizers, not investment-return maximizers.)
The upshot is that for a year in which market indexes are up 9.1% and the smartest investors do much better, Pat Q. Public can still earn maybe 8% as a retail investor in single stocks if she/he doesn't churn it all away in overly rapid trading. That's not a bad outcome.
Stragglers will stay in the game for a long time in such a scenario.
- aswanson 7y agoRight. Even Jim Simons of Renaissance Technologies, has publicly stated that their edge is small. They amplify it with leverage, like all funds do.
- sokoloff 7y agoThough I have a great amount of respect for them, I'll point out that Jim Simons may have multiple motivations to downplay the size of any edge that RenTech has over the averages.
- aswanson 7y agoObviously, but he stated it indirectly; the way he said it was as an aside. But you're right re: his motivations.
- rajacombinator 7y agoAnd yet he leaks the returns of their private fund every year...
- sokoloff 7y agoThe returns of the fund alone don't tell you the level of edge (alpha) of RenTech. Alpha (the skill/edge component) is the excess return on a risk-adjusted basis. Roughly, alpha is total-return - risk-free-rate - porfolio-beta * (market-return - risk-free-rate). You can have a total return of 20%, a risk free rate of 3%, a Beta of 2, and a market return of 13% and you've actually underperformed the market on a risk-adjusted basis. Your alpha would be 20% - 3% - 2 * (13% - 3%) = -3%