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I'm not a banker, economist, or active investor. All of the advices I have received even from most economist are going on long investment and diversify using in

I'm not a banker, economist, or active investor. All of the advices I have received even from most economist are going on long investment and diversify using index fund. Most even comes up with charts of how it significantly outperform hedge funds, private market investments, and other things. It makes me wonder, why are rich people still investing in hedge funds? how are they still getting clients given all the data saying that most index fund outperform hedge funds?

reducesuffering 3y ago
Almost all big university endowments follow the Yale Model[0] as they want asset diversification from the large allocation to market beta (total market index fund) and bonds. Most of the VC $ that funds startup salaries comes from people trying to diversify into other assets outside of the total US market. [0] https://en.wikipedia.org/wiki/David_F._Swensen https://en.wikipedia.org/wiki/David_F._Swensen
jackcosgrove 3y ago
There is a theoretical limit to index fund adoption where the index becomes zombified and price discovery stops happening. I think we're a long way from that point. There are reasons to not invest in index funds (why does anyone invest in bonds?) that have to do with the purpose of the investment not being to maximize return. That said I think there's still a lot of ignorance and gambling going on, which is why the zombie index has yet to rise from the grave.
- missedthecue 3y ago
  At what % (of the stock market being owned by index funds) do you think this will occur?
  - jackcosgrove 3y ago
    I have no idea. I think we're far from that because the spread between passive investing and active management is still in favor of passive investing.
latency-guy2 3y ago
Very important to remember that hedge funds are about maintaining liquidity even during downturns, index funds have built in diversification, but they still match the general market. Hedging has opportunities to have cash available, or commodities that hold their value (including volume to convert it into liquid cash) to make other bets on the way back up. This is also why a lot of investment advice from time immemorial includes diversifying from stocks to bonds and other, more stable instruments as you age (e.g. commodities, real estate, etc.). There's also other things about having a stable volume of trade being good, e.g. reduce the likelihood you are affected by runs, e.g. SVB in 2022, or oil prices in the height of COVID19 panics and supply shocks.
quartesixte 3y ago
Risk appetite and tolerance changes dramatically once you hit many commas and zeros in your net liquid assets. Hedge funds offer to "hedge" enough risk to make rich people feel more comfortable about their money (making rich people feel comfy about their money is a huge business in of itself). Chasing an extra 2-3% in gains in return for exposing yourself to more draw down risk starts feeling very different when you have $200mm in liquid cash and even a modest +5% a year is $10mm. On the other hand, sometimes you want above-average returns and are willing to pay the fee to potentially nab it.

reducesuffering 3y ago

Almost all big university endowments follow the Yale Model[0] as they want asset diversification from the large allocation to market beta (total market index fund) and bonds. Most of the VC $ that funds startup salaries comes from people trying to diversify into other assets outside of the total US market. [0] https://en.wikipedia.org/wiki/David_F._Swensen https://en.wikipedia.org/wiki/David_F._Swensen

jackcosgrove 3y ago

There is a theoretical limit to index fund adoption where the index becomes zombified and price discovery stops happening. I think we're a long way from that point. There are reasons to not invest in index funds (why does anyone invest in bonds?) that have to do with the purpose of the investment not being to maximize return. That said I think there's still a lot of ignorance and gambling going on, which is why the zombie index has yet to rise from the grave.

missedthecue 3y ago
At what % (of the stock market being owned by index funds) do you think this will occur?
- jackcosgrove 3y ago
  I have no idea. I think we're far from that because the spread between passive investing and active management is still in favor of passive investing.

latency-guy2 3y ago

Very important to remember that hedge funds are about maintaining liquidity even during downturns, index funds have built in diversification, but they still match the general market. Hedging has opportunities to have cash available, or commodities that hold their value (including volume to convert it into liquid cash) to make other bets on the way back up. This is also why a lot of investment advice from time immemorial includes diversifying from stocks to bonds and other, more stable instruments as you age (e.g. commodities, real estate, etc.). There's also other things about having a stable volume of trade being good, e.g. reduce the likelihood you are affected by runs, e.g. SVB in 2022, or oil prices in the height of COVID19 panics and supply shocks.

quartesixte 3y ago

Risk appetite and tolerance changes dramatically once you hit many commas and zeros in your net liquid assets. Hedge funds offer to "hedge" enough risk to make rich people feel more comfortable about their money (making rich people feel comfy about their money is a huge business in of itself). Chasing an extra 2-3% in gains in return for exposing yourself to more draw down risk starts feeling very different when you have $200mm in liquid cash and even a modest +5% a year is $10mm. On the other hand, sometimes you want above-average returns and are willing to pay the fee to potentially nab it.