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> The reason hedge funds are falling out of favor is more to do with a surfeit of crappy funds ... > That statistic conceals the limited number of cleverly mana

> The reason hedge funds are falling out of favor is more to do with a surfeit of crappy funds ... > That statistic conceals the limited number of cleverly managed, fast moving funds which were able to take contrary positions in the credit bubble and protect their investor's money by shorting CDSs. Suppose as a matter of self reflection, I determine that I don't have whatever intrinsic ability + learned skill + ??? is needed to pick securities such that will consistently outperform passive investing strategies. Does that necessarily imply that I don't have the ability to pick an active fund from among the available funds that will outperform (given a certain goal)? Or is it a different skill set? Note I'm not asking you to tell me how to go about doing that, I can get ten answers from ten different people. What am asking is there conceptually a talent/skill that would allow me to do that, and should I have any reason to think I've got it?

scrumper 11y ago
What am asking is there conceptually a talent/skill that would allow me to do that, and should I have any reason to think I've got it? Excellent question. The answer, well my answer, is that it's a different skill set. I think the value the manager brings is their skill and diligence in handling the implementation details (which commodities to buy, securities to short, options to write; how to manage risk) of a strategy, which could be as simple as some directional conviction (I like renewables, say) or a philosophy (opportunistic investing in special situations in mid caps). Your skill is that of an educated consumer: deciding what product you want (your conviction), and selecting a provider based on whatever subjective and objective metrics you deem important. Not all that dissimilar from choosing any expert vendor in an area you don't understand in depth - doctors, contractors, lawyers, even financial advisors (to whom you could outsource the selection part entirely, of course) Note that nowhere here am I denying the existence of luck in getting into those funds which were able to do well in the crisis.
- bradleyjg 11y ago
  Re: hiring expert vendors In my experience most people are terrible at that. Even if you go online and look at what other people have to say, those people have no idea about how well the professional did, given that they didn't know expected distribution of outcomes should have been to begin with. Clients often end up being unreasonably thrilled with a mildly positive result in an easy case and unreasonably pissed off with a mildly positive result in a really tough case. The whole thing ends up devolving into a personality, and sometimes literal, beauty contest.
  - scrumper 11y ago
    That's true, though I'd have to hope those people in the market for alternative investments would, if only by virtue of more frequent exposure to professional advisors, have a more sophisticated approach.
    - rahimnathwani 11y ago
      Perhaps that's where funds of funds come in. FoF managers can spend all day evaluating various hedge funds' performance/execution/whatever. But how do you pick a FoF manager?
  - rahimnathwani 11y ago
    True. I'm actually amazed that many business owners are able to select and get good outcomes from expert vendors, when they have a very limited understanding of how those vendors achieve their results. Perhaps this is the reason for the prevalent advice that consultants should sell the benefits/outcomes, get referrals, rather than focus on the technical tasks they will undertake to achieve the outcomes. The business owner to whom they are selling has no means to evaluate claims of their technical chops. But, if they see the consultant has succeeded in something similar for 10 previous clients, then that may be enough for them to make a decision to start.
ScottBurson 11y ago
Heh heh heh this is exactly the right question. A fund is just another tradable instrument. I don't see much difference between evaluating the fund's management and historical performance vs. evaluating those of a public corporation -- except that in the latter case, you can probably get more information. I saw an analysis somewhere that claimed that for mutual funds, annual performance is negatively autocorrelated: the funds that are likeliest to do well next year are the ones that did the worst last year. I wouldn't be surprised if this held true for hedge funds as well.
- scrumper 11y ago
  Except that, in terms of investment exposure, your effort is leveraged significantly when you evaluate a fund's management vs. a single public company.

scrumper 11y ago

What am asking is there conceptually a talent/skill that would allow me to do that, and should I have any reason to think I've got it? Excellent question. The answer, well my answer, is that it's a different skill set. I think the value the manager brings is their skill and diligence in handling the implementation details (which commodities to buy, securities to short, options to write; how to manage risk) of a strategy, which could be as simple as some directional conviction (I like renewables, say) or a philosophy (opportunistic investing in special situations in mid caps). Your skill is that of an educated consumer: deciding what product you want (your conviction), and selecting a provider based on whatever subjective and objective metrics you deem important. Not all that dissimilar from choosing any expert vendor in an area you don't understand in depth - doctors, contractors, lawyers, even financial advisors (to whom you could outsource the selection part entirely, of course) Note that nowhere here am I denying the existence of luck in getting into those funds which were able to do well in the crisis.

bradleyjg 11y ago
Re: hiring expert vendors In my experience most people are terrible at that. Even if you go online and look at what other people have to say, those people have no idea about how well the professional did, given that they didn't know expected distribution of outcomes should have been to begin with. Clients often end up being unreasonably thrilled with a mildly positive result in an easy case and unreasonably pissed off with a mildly positive result in a really tough case. The whole thing ends up devolving into a personality, and sometimes literal, beauty contest.
- scrumper 11y ago
  That's true, though I'd have to hope those people in the market for alternative investments would, if only by virtue of more frequent exposure to professional advisors, have a more sophisticated approach.
  - rahimnathwani 11y ago
    Perhaps that's where funds of funds come in. FoF managers can spend all day evaluating various hedge funds' performance/execution/whatever. But how do you pick a FoF manager?
- rahimnathwani 11y ago
  True. I'm actually amazed that many business owners are able to select and get good outcomes from expert vendors, when they have a very limited understanding of how those vendors achieve their results. Perhaps this is the reason for the prevalent advice that consultants should sell the benefits/outcomes, get referrals, rather than focus on the technical tasks they will undertake to achieve the outcomes. The business owner to whom they are selling has no means to evaluate claims of their technical chops. But, if they see the consultant has succeeded in something similar for 10 previous clients, then that may be enough for them to make a decision to start.

ScottBurson 11y ago

Heh heh heh this is exactly the right question. A fund is just another tradable instrument. I don't see much difference between evaluating the fund's management and historical performance vs. evaluating those of a public corporation -- except that in the latter case, you can probably get more information. I saw an analysis somewhere that claimed that for mutual funds, annual performance is negatively autocorrelated: the funds that are likeliest to do well next year are the ones that did the worst last year. I wouldn't be surprised if this held true for hedge funds as well.

scrumper 11y ago
Except that, in terms of investment exposure, your effort is leveraged significantly when you evaluate a fund's management vs. a single public company.