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Buffett won and it wasn't close: https://www.investopedia.com/articles/investing/030916/buffetts-bet-hedge-funds-year-eight-brka-brkb.asp https://www.investoped

by wslack 6y ago

Buffett won and it wasn't close: https://www.investopedia.com/articles/investing/030916/buffetts-bet-hedge-funds-year-eight-brka-brkb.asp https://www.investopedia.com/articles/investing/030916/buffe...

bschne 6y ago
If I understand this correctly, A—E are not individual actively-managed funds, but actively managed portfolios of actively managed funds? It would be interesting to see the distribution of returns among the contained funds. I lean heavily passive personally, but at least if a not-insignificant fraction of funds outperformed the index and were dragged down by really bad returns in others, it would give some indication as to why people would even _try_ to actively pick where to put their money...
- dehrmann 6y ago
  Not that it would have changed the outcome, but it was also a notoriously bad decade for hedge funds. They usually say it's because of a lack of volatility. It'll be interesting to see if it stays that way, and if the Robinhood crowd will change things.
- aidenn0 6y ago
  Except that as you reduce the sample size, you expect to have some outperform and some underperform. If you 100x pick stocks at random, you will expect to see some fraction of those 100 picks way outperform. Any time you reduce the sample size, you increase the variance, which gives the impression that skill is involved. In fact from just looking at a single distribution of outcomes it's not possible to tell if skill or luck is the cause.
  - fractionalhare 6y ago
    There exist funds which have annualized a two-sigma return over SPY for over 20 years. If you model returns as approximating a normal distribution (e.g. just luck), and you model years achieving a return at least two standard deviations above the mean under a binomial distribution (i.e. number of years they've been exceptionally lucky), the likelihood of those track records existing are around 1 x 10^-37. I would call that sufficient evidence to reject the null hypothesis that the returns are normally distributed, which is to say it's not luck. If you expand your sample size to all investment vehicles throughout history, there still haven't been anywhere nearly enough for such a track record to emerge by chance. Elementary statistics is well equipped to distinguish between a distribution signifying luck and a distribution signifying skill. It's structurally the same as assessing normality, noise, randomness, etc.
    - riffraff 6y ago
      > There exist funds which have annualized a two-sigma return over SPY for over 20 years the problem is that _many_ funds have positive returns until, suddenly, they don't. It's basically as hard to pick a fund or money manager for the long run as it is to pick a stock. Consider Neil Woodford[0], he beat the market for over twenty years and was considered the best investor in Britain. Then started a new set of funds, which went terribly. It'd have been reasonable to let him manage your money, but it would still not have worked out. [0] https://en.wikipedia.org/wiki/Neil_Woodford https://en.wikipedia.org/wiki/Neil_Woodford
      - fractionalhare 6y ago
        That doesn't refute the mathematics demonstrating that people can reliably do this with skill rather than luck. Eventually Brady's not going to be able to play football professionally either. But he still does, and when he can't do it anymore that won't indict his professional record.
        pedrocr 6y ago
        The difference is that our ability to tell if Brady was a good football player 10 years ago doesn't depend on his results today. Whereas a fund manager can turn out to have had a bad strategy all along whose gains are only wiped out after many years of apparent good performance.
        deleted 6y ago
        [deleted]
        fractionalhare 6y ago
        How many actual examples do you have of the same funds blowing up which outperformed for decades? Buffett outperformed SPY for most of his 60 year career. Do you think he doesn't know what he's doing, and it was all luck, just because Berkshire Hathaway isn't doing as well as it used to?
    - 6y ago
aphextron 6y ago
And now we see that the point of hedge funds has nothing to with long term investment growth, and everything to do with short term personal enrichment. When you're playing with other's money, you don't have to think about steady, decades long growth. You just have to nail one big return and make yourself rich on fees.

by wslack 6y ago

bschne 6y ago

If I understand this correctly, A—E are not individual actively-managed funds, but actively managed portfolios of actively managed funds? It would be interesting to see the distribution of returns among the contained funds. I lean heavily passive personally, but at least if a not-insignificant fraction of funds outperformed the index and were dragged down by really bad returns in others, it would give some indication as to why people would even _try_ to actively pick where to put their money...

dehrmann 6y ago
Not that it would have changed the outcome, but it was also a notoriously bad decade for hedge funds. They usually say it's because of a lack of volatility. It'll be interesting to see if it stays that way, and if the Robinhood crowd will change things.
aidenn0 6y ago
Except that as you reduce the sample size, you expect to have some outperform and some underperform. If you 100x pick stocks at random, you will expect to see some fraction of those 100 picks way outperform. Any time you reduce the sample size, you increase the variance, which gives the impression that skill is involved. In fact from just looking at a single distribution of outcomes it's not possible to tell if skill or luck is the cause.
- fractionalhare 6y ago
  There exist funds which have annualized a two-sigma return over SPY for over 20 years. If you model returns as approximating a normal distribution (e.g. just luck), and you model years achieving a return at least two standard deviations above the mean under a binomial distribution (i.e. number of years they've been exceptionally lucky), the likelihood of those track records existing are around 1 x 10^-37. I would call that sufficient evidence to reject the null hypothesis that the returns are normally distributed, which is to say it's not luck. If you expand your sample size to all investment vehicles throughout history, there still haven't been anywhere nearly enough for such a track record to emerge by chance. Elementary statistics is well equipped to distinguish between a distribution signifying luck and a distribution signifying skill. It's structurally the same as assessing normality, noise, randomness, etc.
  - riffraff 6y ago
    > There exist funds which have annualized a two-sigma return over SPY for over 20 years the problem is that _many_ funds have positive returns until, suddenly, they don't. It's basically as hard to pick a fund or money manager for the long run as it is to pick a stock. Consider Neil Woodford[0], he beat the market for over twenty years and was considered the best investor in Britain. Then started a new set of funds, which went terribly. It'd have been reasonable to let him manage your money, but it would still not have worked out. [0] https://en.wikipedia.org/wiki/Neil_Woodford https://en.wikipedia.org/wiki/Neil_Woodford
    - fractionalhare 6y ago
      That doesn't refute the mathematics demonstrating that people can reliably do this with skill rather than luck. Eventually Brady's not going to be able to play football professionally either. But he still does, and when he can't do it anymore that won't indict his professional record.
      - pedrocr 6y ago
        The difference is that our ability to tell if Brady was a good football player 10 years ago doesn't depend on his results today. Whereas a fund manager can turn out to have had a bad strategy all along whose gains are only wiped out after many years of apparent good performance.
        deleted 6y ago
        [deleted]
        fractionalhare 6y ago
        How many actual examples do you have of the same funds blowing up which outperformed for decades? Buffett outperformed SPY for most of his 60 year career. Do you think he doesn't know what he's doing, and it was all luck, just because Berkshire Hathaway isn't doing as well as it used to?
  - 6y ago

aphextron 6y ago

And now we see that the point of hedge funds has nothing to with long term investment growth, and everything to do with short term personal enrichment. When you're playing with other's money, you don't have to think about steady, decades long growth. You just have to nail one big return and make yourself rich on fees.