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>Someone who merely bought and held tech stocks, like Apple & Nvidia, beat virtually all funds since 2009. This is a common misconception or a poorly phrased s

by Kranar 4y ago

>Someone who merely bought and held tech stocks, like Apple & Nvidia, beat virtually all funds since 2009. This is a common misconception or a poorly phrased statement. It's not true that someone who bought/held tech stocks, or an ETF beat virtually all managed funds or that holding on to ETFs beats virtually every managed fund. It's true that passive investing, in tech or ETFs would have beat the average managed fund, and it's also true that an investor is better off investing in an ETF/diversified portfolio, but there are exceptional managed funds that significantly outperform the market. The problem is that you are no more likely to know which managed fund will outperform the market than you are to know which stock will outperform the market. Picking a fund that will outperform the market, especially after fees, is just as hard as picking stocks, and in fact it might be even harder due to the fees. But this does not mean that all, or virtually all funds perform worse than the market or even a segment of it. One of the advantages of hedge funds in particular is that they can employ leverage in a way that provides almost all of the upside of leverage while protecting an investor from some of the downside. For example if I, as an individual, used leverage to trade on the market and some black swan even happens, not only would I lose the amount I invested, I could also end up in debt and have to sell my house or other assets to cover my obligations. If I use leverage through a hedge fund, then I still get almost all of the benefits if the market moves in my favor, but if the market moves heavily against me the most I can lose is my investment.

paulpauper 4y ago
For example if I, as an individual, used leverage to trade on the market and some black swan even happens, not only would I lose the amount I invested, I could also end up in debt and have to sell my house or other assets to cover my obligations. This is not true. The broker would try to liquidate your positions well before that happens. Failure to put up collateral means your position will be forcibly closed. It's called Maintenance Margin. The last thing the broker is going to allow is for its clients to incur a debt and be on the hook. The hedge fund instead will send you a letter that your money is gone. Same thing.
- Kranar 4y ago
  I'd be very careful to categorically state what is true or isn't true on a topic that you may not quite be an expert in. Brokers have no ability to liquidate a position on a company that declares bankruptcy after market hours. In fact, most major events happen during times when trading is either halted or the market is closed. As sad as it is, there are people who have committed suicide over having a negative balance including this individual who carried a -$730,000 balance: https://www.nytimes.com/2020/07/08/technology/robinhood-risky-trading.html https://www.nytimes.com/2020/07/08/technology/robinhood-risk...
Panzer04 4y ago
That largely depends on the type of leverage used (not all individual margin loans have the same conditions). It's possible to get pretty good terms as an individual in some circumstances (mostly if the loans are smaller and personally guaranteed), mostly by getting loans without margin calls attached. If you own a home, you can trivially borrow against it to invest without the risk of a margin call. It's all tradeoffs - the broader the conditions at which a bank can recall your margin, the cheaper the interest and lower personal guarantee requirements (some may not hold you personally liable for negative balances - check your T&Cs). Funds can obviously borrow more, and at lower interest rates because of that though. Obviously their loans will be wound up on the way down no matter what, because the bank can't get money out of a negative balance like they would an individual. Funds also don't tend to all-in on three tech stocks, so the fact they are very exposed to volatility with that type of leverage is less of an issue.
- Kranar 4y ago
  Nothing you've said has any relevance to this discussion. Regardless of what kind of leverage you use, if you're the one using it then you can end up with a negative balance putting you in debt. Case closed. As for your other comment trying to be pedantic about funds owning three stocks, there are numerous publicly traded leveraged funds that trade just a single stock, one single stock [1]. They are known as single-stock ETFs and the purpose of these funds is specifically to provide an indirect form of leverage to investors. For example, IRA accounts are forbidden from using leverage, but someone can use an IRA account to purchase a leveraged ETF including a single stock ETF. [1] https://www.direxion.com/single-stock-leveraged-etfs https://www.direxion.com/single-stock-leveraged-etfs
  - Panzer04 4y ago
    There's definitely margin products that will guarantee you aren't liable for the debt (but correspondingly will margin call you and limit the debt/equity ratio), and there are margin products that are the opposite (no margin calls, but full recourse and liability for negative balances). The point is it's not cut and dry that the market geared equity solution is superior (though, IMO, the individual advantage lays on the side of things without margin calls, but full recourse - you can ride through a downturn without being forced to sell, assuming you keep your job and other risks etc etc). Those single stock ETFs are significantly more limited than full-market geared funds (1.5x rather than more typical 2-3x). Equity geared ETFs are definitely just straight up more convenient (and safer) for the vast majority of people and situations though, I agree with you on that.
rustamm 4y ago
Just because a managed fund outperformed a market doesn't mean it didn't happen by pure luck. There are lots of managed funds and most of them are not profitable. If each chooses portfolio randomly, some of them will outperform the market.
- Kranar 4y ago
  Can you please quote what you think you're disagreeing with me about or how your reply has any relevance to my post? Did you perhaps intend to reply to someone else?
  - fartsucker69 4y ago
    your post implies that - even though it's difficult to do - one could perhaps pick a good fund and be better off than investing into e.g. ETFs. the poster you're replying to implies that this might not be possible at all if the successful funds only are so because of random chance.
    - Kranar 4y ago
      I highly doubt rustamm or anyone partaking in this discussion is remotely qualified to know whether the most successful hedge funds, including Renaissance Technologies, Citadel, or Bridgewater are successful simply due to luck.

by Kranar 4y ago

paulpauper 4y ago

For example if I, as an individual, used leverage to trade on the market and some black swan even happens, not only would I lose the amount I invested, I could also end up in debt and have to sell my house or other assets to cover my obligations. This is not true. The broker would try to liquidate your positions well before that happens. Failure to put up collateral means your position will be forcibly closed. It's called Maintenance Margin. The last thing the broker is going to allow is for its clients to incur a debt and be on the hook. The hedge fund instead will send you a letter that your money is gone. Same thing.

Kranar 4y ago
I'd be very careful to categorically state what is true or isn't true on a topic that you may not quite be an expert in. Brokers have no ability to liquidate a position on a company that declares bankruptcy after market hours. In fact, most major events happen during times when trading is either halted or the market is closed. As sad as it is, there are people who have committed suicide over having a negative balance including this individual who carried a -$730,000 balance: https://www.nytimes.com/2020/07/08/technology/robinhood-risky-trading.html https://www.nytimes.com/2020/07/08/technology/robinhood-risk...

Panzer04 4y ago

That largely depends on the type of leverage used (not all individual margin loans have the same conditions). It's possible to get pretty good terms as an individual in some circumstances (mostly if the loans are smaller and personally guaranteed), mostly by getting loans without margin calls attached. If you own a home, you can trivially borrow against it to invest without the risk of a margin call. It's all tradeoffs - the broader the conditions at which a bank can recall your margin, the cheaper the interest and lower personal guarantee requirements (some may not hold you personally liable for negative balances - check your T&Cs). Funds can obviously borrow more, and at lower interest rates because of that though. Obviously their loans will be wound up on the way down no matter what, because the bank can't get money out of a negative balance like they would an individual. Funds also don't tend to all-in on three tech stocks, so the fact they are very exposed to volatility with that type of leverage is less of an issue.

Kranar 4y ago
Nothing you've said has any relevance to this discussion. Regardless of what kind of leverage you use, if you're the one using it then you can end up with a negative balance putting you in debt. Case closed. As for your other comment trying to be pedantic about funds owning three stocks, there are numerous publicly traded leveraged funds that trade just a single stock, one single stock [1]. They are known as single-stock ETFs and the purpose of these funds is specifically to provide an indirect form of leverage to investors. For example, IRA accounts are forbidden from using leverage, but someone can use an IRA account to purchase a leveraged ETF including a single stock ETF. [1] https://www.direxion.com/single-stock-leveraged-etfs https://www.direxion.com/single-stock-leveraged-etfs
- Panzer04 4y ago
  There's definitely margin products that will guarantee you aren't liable for the debt (but correspondingly will margin call you and limit the debt/equity ratio), and there are margin products that are the opposite (no margin calls, but full recourse and liability for negative balances). The point is it's not cut and dry that the market geared equity solution is superior (though, IMO, the individual advantage lays on the side of things without margin calls, but full recourse - you can ride through a downturn without being forced to sell, assuming you keep your job and other risks etc etc). Those single stock ETFs are significantly more limited than full-market geared funds (1.5x rather than more typical 2-3x). Equity geared ETFs are definitely just straight up more convenient (and safer) for the vast majority of people and situations though, I agree with you on that.

rustamm 4y ago

Just because a managed fund outperformed a market doesn't mean it didn't happen by pure luck. There are lots of managed funds and most of them are not profitable. If each chooses portfolio randomly, some of them will outperform the market.

Kranar 4y ago
Can you please quote what you think you're disagreeing with me about or how your reply has any relevance to my post? Did you perhaps intend to reply to someone else?
- fartsucker69 4y ago
  your post implies that - even though it's difficult to do - one could perhaps pick a good fund and be better off than investing into e.g. ETFs. the poster you're replying to implies that this might not be possible at all if the successful funds only are so because of random chance.
  - Kranar 4y ago
    I highly doubt rustamm or anyone partaking in this discussion is remotely qualified to know whether the most successful hedge funds, including Renaissance Technologies, Citadel, or Bridgewater are successful simply due to luck.