And I'm just going to self-promote a bit and say that the bet was registered via a project I worked on, the Long Now Foundation's project Long Bets:<p><a href="http://longbets.org/" rel="nofollow">http://longbets.org/</a><p>We've been going since 2002: <a href="https://www.wired.com/2002/05/longbets/" rel="nofollow">https://www.wired.com/2002/05/longbets/</a><p>We are happy to host bets of long-term significance, and the minimum bet is only $200/side. I am glad to personally help shepherd people who are serious about bets to make sure you get through the process.<p>I would especially like to see HNers making bets about the things we argue a lot about. Bitcoin! VR! Uber! If you're tired of people posting waffle on some topic where you have a strong opinion, then challenge them to put money down.
This does not surprise me.<p>My personal experience with hedge fund managers is that they are good salesmen that peddle their financial expertise to clients, convincing them of their financial rock-star status (usually gained through a lucky investment or two). Paulson is a classic example. Wealthy individuals buy into it, especially those that are less educated (e.g. those that have inherited money), and happily allocate away their money to these guys. Once the funds grow to a certain size, then they might consider pitching their investments to pension funds, and their money pot grows, as does the nominal value of their fees. By the time they have pension funds on board, their investments get less and less risky, eventually looking more and more like a basket of standard commodities or a standard equity index! Thus, the value they add also becomes smaller and smaller.<p>In my opinion, the hedge fund industry is a bit of a farce, but there are a small number of firms that do have a secret sauce that works sometimes (rarely forever though). In my experience, the firms that tend to make consistent money are the market makers, rather than the speculators.
Reminds me a little of traffic. Yesterday I was cruising down the highway in the leftmost lane, going about 80 with a line of other cars. The other two lanes were actually more clear, but cars were going much slower.<p>I notice this one car, weaving in and out of traffic in these two lanes, trying desperately to get ahead, constantly cutting people off. They did this for 40 miles, weaving in and out, sometimes getting ahead of me by quite a bit, sometimes falling behind.<p>If they had just stayed in the left lane and cruised, they would have arrived at their destination at exactly the same time.<p>My point is, it seems to be human nature to be bad at estimating long term averages, whether it be stock picks or just driving down the road. Checkout lanes are another example that comes to mind.
For anyone interested in this bet, Ted Seides (the losing party) did a good podcast on the topic: <a href="http://capitalallocatorspodcast.com/BetwithBuffett/" rel="nofollow">http://capitalallocatorspodcast.com/BetwithBuffett/</a><p>My layman's understanding of hedge funds is they are better at hedging losses than increasing gains. So in good years they might underperform the broader market (e.g. gain 9% instead of 12%), but in bad years they should lose much less (e.g. lose 5% instead of 15%).<p>I think this bet was largely a bet on the broader market dropping after a long run-up (which would theoretically favor hedge funds), but instead the market kept rising more and more.
Has anyone done the analysis to see if the stock-picking by those managers was worth anything at all?<p>Obviously it wasn't worth the fees they charged. But if all those fees had been flattened down to the same expense as the Vanguard fund, would their advice have been worth anything over the index? To a first approximation, it looks like the answer is no.
It's interesting that while the S&P did beat these hedge funds, Buffet's own Berkshire Hathaway (BRK.B) seems to have beat the S&P handily[0], with an increase of ~130% from $77.93 in 2007 to $179.89 today.<p>I know Berkshire isn't actually a hedge fund, but is very analogous to a giant mutual fund, albeit one that takes a very active ownership role in the companies whose shares it owns.<p>0:<a href="http://quotes.morningstar.com/chart/stock/chart.action?t=BRK.B&region=USA&culture=en_US" rel="nofollow">http://quotes.morningstar.com/chart/stock/chart.action?t=BRK...</a>, look at the 10-year chart.
Index funds will almost always outperform actively managed funds. They are the best choice for the layman investor. An excellent book on this topic is The Little Book of Common Sense Investing by John Bogle.<p><a href="https://www.amazon.com/Little-Book-Common-Sense-Investing/dp/0470102101" rel="nofollow">https://www.amazon.com/Little-Book-Common-Sense-Investing/dp...</a>
I feel like there's some cognitive dissonance surrounding hedge funds in popular culture -- on the one hand you have people saying that any outsized short-term gains seen by hedge funds are the result of some selection/survivorship bias, and on the other hand you have people saying that any outsized returns are the result of illegal privileged information (see the TV show 'Billions').<p>I realize that there are enough hedge funds out there that both things can be happening. It's too bad that there's so little visibility into the industry, it would be fascinating to see some kind of hedge fund taxonomy.
It is not really surprising that a large group of hedge funds underperformed the S&P500. In fact, William Sharpe made the argument a long time ago: in aggregate, active investors hold the passive portfolio and earn the same return as passive investors before fees, but lower returns after fees. In aggregate, this is always and necessarily true: <a href="https://web.stanford.edu/~wfsharpe/art/active/active.htm" rel="nofollow">https://web.stanford.edu/~wfsharpe/art/active/active.htm</a>
So clearly, for the individual, the optimal strategy is to simply invest in index funds and just wait.<p>But a new question that is being raised is: "what happens if everyone only invests in index funds?"
If anyone finds this surprising I'd highly recommend reading 'Smarter Investing' by Tim Hale, which does a great job of advocating for index-based positions. With the exception of C, those fund-of-funds have done incredibly badly.<p>One of the interesting things Tim discusses is that this poor performance compared to market tends to make investors second-guess their investments (often for good reason looking at those returns), and buy into the fund that did well last year instead. So you're also getting into a sell-low-buy-high routine.
Question for financial types: For a few years I've owned a small selection of shares in FTSE companies (15 of them at the moment). I don't really do this scientifically, I just look for large, well-established companies where their shares look cheaper than long run, and buy those. (Partly I do this so I can see everyday companies that I own a tiny bit of). Is this practically equivalent to owning index-linked funds? Am I missing out? I plan to hold them for many years, and it's mostly "play money".
Although there is still tons of money going to actively managed funds it seems to be more and more common knowledge that index fund investing is ultimately the smartest thing to do for personal finance.<p>Does anyone know what the risk factors are (if any) to this type of passive investing if EVERYONE begins to do the same thing?
For context the losers argument is that Buffet picked a good team in a good period and he would have a good chance in a second cycle. <a href="https://www.bloomberg.com/view/articles/2017-05-03/why-i-lost-my-bet-with-warren-buffett" rel="nofollow">https://www.bloomberg.com/view/articles/2017-05-03/why-i-los...</a>.
Am I reading that right? S&P500 nets you on average a 10% annual return of investment? Does that mean you can "just" invest ten times your yearly living expenses and practically live off idle income? How does that not completely destroy the economy and why isn't everyone doing it?
Hedge fund guy here.<p>- You have to consider risk. Perhaps use volatility as a proxy. Were the funds more or less volatile than the S&P? There are funds that are more and funds that are less. The bet ought to be adjusted for that, ie some form of risk adjusted return.<p>- It's a rigged bet. A fund of 5 funds of funds is going to be the market, minus fees. Yes there are funds that aren't just long the market but quite a lot will be. Many managers find it a sensible bet to add some beta, because the market often goes up and you will often be judged vs the market, not absolute returns. Throw them all together in a pot and all the spice is gone. Now take out fees.<p>- Plenty of individual funds did beat the S&P (I'll toot my own horn here), but to beat the average someone's gotta be under average, typically other hedge funds.<p>- You have to wonder how the bet would have fared had we not experienced the unprecedented reaction of central banks to the crisis. I don't know if Buffett had considered that, he's a smart guy, but it didn't seem like that was what the bet was about. If the market had been allowed to take a "more natural" course perhaps the funds would have looked better.<p>- You can find long periods in the past where the S&P was sideways. The constant advice to index is simplistic. Think about your own situation before you do that, there's at least a lot of interesting things to learn before you give up.<p>------Edit------<p>Seems to be a lot of response to this. Now I'm not saying it was particularly smart to bet against the market. In fact if you read closely you can see why. Which side of the bet would I have taken? Well, if I wasn't running a fund, I'd have taken Warren's side, for the same reason. As it happens you have very little credibility as a fund manager if you're not invested in your own fund, so I ended up backing myself. (Which is not quite the same as the bet.)<p>For your average guy, I don't think there's a smart way for you to pick a fund to beat the market. You have to spend time actually investigating each strategy. An example of a fund who I think will provide a risk-adjusted market beating return is a guy I met once. He knows a bunch of stuff in detail about the valuation of exchange traded funds, and has infrastructure (technical and legal) in place to exploit discrepancies. It's quite far away from what people normally talk about when they talk about "investment". Most managers do not do this; they will just give you a variant of "I'm good at guessing and I can handle risk".<p>Regarding central bank intervention, of course it's a manager's job to think about what might happen. I'm merely saying that most of them probably didn't see it coming, and that that is the major component of the underperformance. Consider that the HF marketing is basically "we'll think about the future for you". Now if what ends up happening is basically that you should buy everything and hold it, then why would you expect a guy who can predict turns to do any better than the market? Keep in mind you're paying fees for him to sell and buy as things go up and down. Note that several managers did in fact close down, not because of catastrophic losses, but because they got fed up with the game.
Key here is long term. If you are investing for long term and choose hedge fund then you are a sucker. Smart investors choose hedge fund only for short term investments and only because they know the fund is trying to exploit some information asymmetry. Such funds are usually ultra secretive and you would get to invest in it only because you knew someone running it.
Even though Efficient Market Hypothesis doesn't take into account some short-term subtleties and inconsistencies of human behavior, the insights it provides tend to dominate in the long term, which seems to be the case here with Mr Buffet's winning bet.
So obviously the Hedgefund didn't beat the market enough to have a better return for the investors....<p>But is there anyway to compare the (Returns + Extracted Money Through Fees) vs S&P500 to see the potential return of the Hedgefund before the fees were extracted?
I don't have problem people investing their personal money in hedge funds, but as indicated by the article, large institutions also invest in hedge funds, which in many cases are just a collection of smaller hedge fund, each charging hefty fee.
> The five he selected had invested their money in more than 100 hedge funds,<p>Wouldn't the average performance of that large a set anyway approach that of the S&P?
Okay so any leveraged real estate fund would have outperformed the S&P500, without the possibility of a sudden margin call<p>Any leveraged bond fund should have been able to as well, a carry trade from 2012 in European government bonds should have made many hundreds of percent<p>A futures fund should have been able to<p>A commodity options should have made monumental gains over the 85% that the S&P500 gave in 10 years, honestly should have made that in a month<p>A fund that did what Warren Buffet got rich doing, by buying up bad companies and improving, should still have gotten high returns<p>And finally, there were simply no cryptocurrency funds around!<p>The problem, I say smugly, is that these fund of funds were probably all macro funds with too many assets under management, making them hard to manage in the niche markets I proclaimed.<p>A fund with 1 billion AUM cannot manage that much real estate without eating into the management fees. There is not enough liquidity in the options market, and definitely not enough liquidity in cryptocurrencies.<p>But this unfortunately influences perception that "NOBODY" is able to make / promise more than 5% a year over several years. This is false but I'm not going to try to change your mind. Consolidating capital with someone managing <500k to around 25 million should be able to consistently take advantage of these less scalable opportunities for great profits. After all, it is how Warren Buffett himself got 100s of thousands of percentage gains in his hedge fund of $105,000.
The problem IMO is that stocks outperform bonds in the first place because of the debt-based economy. I suspect it is part of why Glass-Steagell was repealed in the first place.
What is increasing S&P value other than the crowd willing to walk a little further out on the gangplank?<p>I'd say it's a little too early to call that bet.<p>(people can vote this one down as much as they want. The reality is that is the only thing making the value go up now.. just more people crowding into the same trade. Watch out when the crowd changes its mind)