wbern wrote:First off, Mr. Light deserves real credit for discussing multifactor regression in the WSJ. When was the last time you read about that subject in the Journal, let alone in a lesser mass-market publication?
Second, neither Mr. Light nor I recommended the replication strategy; it was simply a pedagogical tool to demonstrate how you could passively mimic the average hedge fund strategy at a tenth the cost with better results and much better liquidity.
The best way to persuade non-Bogleheads not to do stupid things like invest in hedge funds is not to hit them over the head with how dumb they are for doing so, but rather to show them just how much they're paying for nothing, and I think Joe's piece did a pretty good job of that.
When I read Mr. Light's WSJ article yesterday I had a deja vu moment.
I sit on the investment committee of an endowment with a substantial commitment to "diversifying equity" ("hedge fund" is so unsophisticated a term). We are advised by a very large international consulting firm which meets with our committee quarterly.
I had noted that for some time our 3 year performance consistently trailed our benchmark, while our 5 year performance was slightly better than benchmark. No mystery here. Our hedge funds lost considerably less than mainsteam equities from September 2008 to March 2009, but have been a drag on equity performance since the market bottom of March 2009.
In addition to our hedge fund allocation we also have a substantial allocation to the GMO "quality equity" style (see GQEFX for details). This GMO style invests in the largest, and bluest, of blue chip equities. Just prior to our October quarterly meeting I was reading our briefing book and noticed something that I hadn't focused on before, but was vaguely aware of. This "quality equity" performance also held up much better than mainstream equities during the 2008-2009 meltdown, but had dampened performance since mid 2009.
I dug out my March 2009 and March 2010 briefing books to see exactly what happened with our hedge funds compared to our "quality equity" in performance. Guess what. Hedge funds declined MORE than "quality equities" from 3/31/2008 to 3/31/2009, but bounced back LESS from 3/31/2009 to 3/31/2010.
In digging around on Morningstar I noticed that Vanguard has a Dividend Growth Fund (VDIGX) which is managed by Wellington Management and has exhibited a performance that is remarkably similiar to the performance of GQEFX.
Is there more than one way to skin a (hedge fund) cat or are you and Jeremy Grantham simply exhibiting slight variations of the same theme?