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Most stunning thing in this article to me: "The GameStop saga marks a fall from grace for Melvin, which gained 52 percent last year, ranking it among the best

Most stunning thing in this article to me: "The GameStop saga marks a fall from grace for Melvin, which gained 52 percent last year, ranking it among the best performing hedge funds." This is kind of surprising. I personally know a few retail investors who crushed that number. Not with fancy day trading, just owning a few good companies. I know it's a lot harder for institutions to get outsized returns, I just didn't expect the best hedge funds didn't do better in what turned out to be a softball market for investors.

fractionalhare 6y ago
This is why we have the term, "capacity constraints." Melvin accomplished those returns in a year where they would have started off with $10B or close to it. The retail investors you know did it on what, $100k? $1M? The liquidity available to retail investors is completely different from the liquidity available to firms with an 11 digit book. Assuming those retail investors actually have a working strategy, they can basically invest in anything. If they find alpha in trading some overlooked company worth $100M total, they can deploy all their capital and make an outsized return. If a multibillion dollar hedge fund finds alpha in a $100M company, they can make a great return of 50% on let's say...0.1% of their capital, assuming they can buy 10% of that company without meaningfully moving the price against them. So you have an 11 digit book, and you have to get an outsized return. You either find tons and tons of these little tiny companies you can buy single digit percentages of, or you win on big bets from a blue chips that can absorb your liquidity. Or some mix in between. Or you expand to foreign assets, or another class of asset that can handle the weight you're moving around. But you are fundamentally limited, and whatever you do has a different profile of risk attached to it. You are also bound by the risk thesis of your firm and what your investors' goals are. That's not to say all hedge funds outperform retail. A lot of them plainly suck and fail to accomplish their mandate. But this is too uncharitable a take; the liquidity and risk characteristics are completely different. It's incomparable.
- ogre_codes 6y ago
  Sure, but I'm not talking about complex strategies here. If you can't beat a retail investor with a straightforward portfolio of middle of the road stocks like "AMZN, AAPL, BRK, DIS", what is the point of a hedge at all? Particularly when their tactics put them in such a high risk category. All of what I'm talking about would have scaled perfectly fine with a $10b portfolio, these are giant corporations with a combined market cap around $4 trillion.
  - fractionalhare 6y ago
    I think you might be underestimating the complexity involved in doing anything with equities at $10B. I also wouldn't classify this as high risk. This risk is arguably novel. Short squeezes have happened before, sure, but not with the same sort of trigger. This is probably a new risk signal for the 30 or so funds which were blown out that haven't been as well publicized.
  - nrmitchi 6y ago
    I think you're sort of mis-understanding one of the main purposes of a hedge fund (at least historically); they are often meant to obtain returns that are un-correlated with the overall market. Just dumping all of the funds into the market explicitly does not do that.
flunhat 6y ago
The smaller the amount of capital you manage, the “easier” it is to get large returns on a % basis. There’s a video where Warren Buffett talks about this behavior (a bird hunting club that ended up finding oil, hopefully someone can find the video for me).
CTDOCodebases 6y ago
Bull market gains are easy to brag about. It’s high year to year gains over varying market conditions that is the goal. Though you could argue the hedge funds failed to see the influence of the retail investors entering the market and missed out on the gains.
annexrichmond 6y ago
One year is a pretty small window to compare the performance of two investors or portfolios. If they are performing better than them for over 5 years, maybe that’s something to write home about.

fractionalhare 6y ago

This is why we have the term, "capacity constraints." Melvin accomplished those returns in a year where they would have started off with $10B or close to it. The retail investors you know did it on what, $100k? $1M? The liquidity available to retail investors is completely different from the liquidity available to firms with an 11 digit book. Assuming those retail investors actually have a working strategy, they can basically invest in anything. If they find alpha in trading some overlooked company worth $100M total, they can deploy all their capital and make an outsized return. If a multibillion dollar hedge fund finds alpha in a $100M company, they can make a great return of 50% on let's say...0.1% of their capital, assuming they can buy 10% of that company without meaningfully moving the price against them. So you have an 11 digit book, and you have to get an outsized return. You either find tons and tons of these little tiny companies you can buy single digit percentages of, or you win on big bets from a blue chips that can absorb your liquidity. Or some mix in between. Or you expand to foreign assets, or another class of asset that can handle the weight you're moving around. But you are fundamentally limited, and whatever you do has a different profile of risk attached to it. You are also bound by the risk thesis of your firm and what your investors' goals are. That's not to say all hedge funds outperform retail. A lot of them plainly suck and fail to accomplish their mandate. But this is too uncharitable a take; the liquidity and risk characteristics are completely different. It's incomparable.

ogre_codes 6y ago
Sure, but I'm not talking about complex strategies here. If you can't beat a retail investor with a straightforward portfolio of middle of the road stocks like "AMZN, AAPL, BRK, DIS", what is the point of a hedge at all? Particularly when their tactics put them in such a high risk category. All of what I'm talking about would have scaled perfectly fine with a $10b portfolio, these are giant corporations with a combined market cap around $4 trillion.
- fractionalhare 6y ago
  I think you might be underestimating the complexity involved in doing anything with equities at $10B. I also wouldn't classify this as high risk. This risk is arguably novel. Short squeezes have happened before, sure, but not with the same sort of trigger. This is probably a new risk signal for the 30 or so funds which were blown out that haven't been as well publicized.
- nrmitchi 6y ago
  I think you're sort of mis-understanding one of the main purposes of a hedge fund (at least historically); they are often meant to obtain returns that are un-correlated with the overall market. Just dumping all of the funds into the market explicitly does not do that.

flunhat 6y ago

The smaller the amount of capital you manage, the “easier” it is to get large returns on a % basis. There’s a video where Warren Buffett talks about this behavior (a bird hunting club that ended up finding oil, hopefully someone can find the video for me).

CTDOCodebases 6y ago

Bull market gains are easy to brag about. It’s high year to year gains over varying market conditions that is the goal. Though you could argue the hedge funds failed to see the influence of the retail investors entering the market and missed out on the gains.

annexrichmond 6y ago

One year is a pretty small window to compare the performance of two investors or portfolios. If they are performing better than them for over 5 years, maybe that’s something to write home about.