hedge funds dropping like flies

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larryswedroe
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hedge funds dropping like flies

Post by larryswedroe »

http://www.etf.com/sections/index-inves ... ping-flies

the hedge fund graveyard is getting crowded

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oldzey
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Re: hedge funds dropping like flies

Post by oldzey »

Thanks for sharing, Larry!

Saw this today as well: http://www.marketwatch.com/story/warren ... 2015-10-16
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Maynard F. Speer
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Re: hedge funds dropping like flies

Post by Maynard F. Speer »

The Credit Suisse hedge fund indexes

I'd see it as an area with so many measurement problems (how you build an index, how you fill in the 60-80% of missing gaps), where you measure from, whether we should consider the rates environment since the 80s about the best environment we're likely to see for stock/bond portfolios for a long time, whether hedge funds are actually an asset class, etc

You can probably paint whatever picture you want ... As an investor, my only questions are whether the hedge funds I invest in are still attracting the brightest minds in finance, and whether they act as true diversifiers over the long term ... Hedge funds will never replace index funds for me, they have however replaced gold, commodities and cash

Image

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Re: hedge funds dropping like flies

Post by larryswedroe »

Maynard
Few things
First hedge funds did generally well up to about 2002. It was relatively small industry and little capital employed in it. 20 years ago only about $300b. Today approaching 10x that.
Second, don't know if the indices you show are biased or not, and there are huge biases in data that can easily add up to 7% or more--liquidation bias, self reporting bias, instant history bias being just a few

Third, Bill Bernstein did study on hedge funds and broke 15 year period into three equal parts-first five years 98-02, big alpha. Next five years as cash flowed in slightly negative alpha. And next five years big negative alpha.

And finally as I noted the HFRX Global Hedge Fund Index underperformed every major asset class for last 10 years.

Larry
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Re: hedge funds dropping like flies

Post by backpacker »

larryswedroe wrote:hedge funds dropping like flies
That's what we need. A Bogleheads® hedge fund swatter. Or maybe a few Venus hedge fund traps.
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Re: hedge funds dropping like flies

Post by afan »

For the reasons Larry listed, it is hard to come up with reliable hedge fund data for earlier time periods. Since they started creating investable indexes free of these biases the returns have been uninspiring. I suspect the "good old days" were simply the days of incomplete data with lots of poorly performing funds simply not reporting.

In some studies they looked at funds of funds. The found that the returns as reported by the funds of funds- which were invested in the hedge funds and thus did not rely on public reporting- trailed the publicly reported returns. In other words, the fund of funds data was free of bias and gave an accurate picture of the returns to the industry, while the public data did not.

The appeal seems to be the possibility of outstanding returns, which is not possible with straight market weighted index funds. If this possibility is valuable enough to people, then hedge funds are about the only way to get it. For people who want this badly enough it is worth it to them to invest in something with a poor expected return but with the possibility of a run of luck. Sort of like investing in roulette. I don't get the appeal, but a lot of people do it. As more active mutual funds use hedge fund like strategies, for example AQR, the market of people betting on being lucky may move to somewhat lower fees. Hardly Boglehead behavior, but a step in the right direction.

It is hard to accept the "brightest minds in finance" as the explanation of high returns of some funds since many of the same people also run funds that have folded. Are they bright at noon while they are picking investments for the fund that is still alive and dumb at 12:15 when they are picking investments for the fund that died? Or is it what one would expect for a large industry that still has lots of reporting bias and extremely noisy returns? Under those circumstances one would expect to see outliers all the time, which is what happens.
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Maynard F. Speer
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Re: hedge funds dropping like flies

Post by Maynard F. Speer »

larryswedroe wrote:Maynard
Few things
First hedge funds did generally well up to about 2002. It was relatively small industry and little capital employed in it. 20 years ago only about $300b. Today approaching 10x that.
Second, don't know if the indices you show are biased or not, and there are huge biases in data that can easily add up to 7% or more--liquidation bias, self reporting bias, instant history bias being just a few

Third, Bill Bernstein did study on hedge funds and broke 15 year period into three equal parts-first five years 98-02, big alpha. Next five years as cash flowed in slightly negative alpha. And next five years big negative alpha.

And finally as I noted the HFRX Global Hedge Fund Index underperformed every major asset class for last 10 years.

Larry
Well I have no idea how one would construct a useful hedge fund index - I understand the major problem is the largest funds don't tend to report earnings, and as an investor I can quite appreciate that (I tend to see the media's obsession with benchmarks - the 'short-term performance derby' - as a constraint on fund managers .. We hear the main advantage endowment funds have is a sensible long-term horizon ... To a large extent I see hedge funds as a way to invest with institutions and away from the rabble)

I also may be in a slightly alternate universe investing primarily in the UK and Europe - where our active mutual funds have outperformed over most periods now, and where hedge funds have closer geographic ties to what I'd see as clearly inefficient markets, such as the FTSE AIM, where our top performing hedge fund this year (City Financial Absolute Equity) has mainly been invested

Over here certainly the best time for big hedge funds was 2007-2009 - my two long-term holdings were both averaging 15-20% returns those years
"Economics is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions." - John Maynard Keynes
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Re: hedge funds dropping like flies

Post by larryswedroe »

Maynard
All the data I have seen, including from SPIVA and academic studies show completely opposite finding to your claims for active managers. Perhaps it's because of bad benchmarks.

The recent SPIVA data looked at domestic funds across the global and for developed and emerging markets for last five years the average was about 20% of active funds outperformed. So don't know what data you are looking at, but almost assuredly it's wrong (the simple cost matters hypothesis and Sharpe's paper on math of active management show that your claim almost certainly cannot be correct)
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Re: hedge funds dropping like flies

Post by Maynard F. Speer »

afan wrote:It is hard to accept the "brightest minds in finance" as the explanation of high returns of some funds since many of the same people also run funds that have folded. Are they bright at noon while they are picking investments for the fund that is still alive and dumb at 12:15 when they are picking investments for the fund that died? Or is it what one would expect for a large industry that still has lots of reporting bias and extremely noisy returns? Under those circumstances one would expect to see outliers all the time, which is what happens.
Well many of the best hedge funds (such as Daniel Loeb's Third Point Offshore) nearly folded in 2008/09 because of liquidity issues when everyone (in many cases very misguidedly) wanted to pull money out of risk assets ... It scraped through by the skin of its teeth and has since implemented tighter risk controls

This is a fund that's averaged in the region of 25% returns since the 90s

So there are certainly risks - albeit different ones - and I don't think hedge funds will ever be panaceas, or no-brainer alternatives to stock and bond indices ... But when I look at bond yields today - as much as I don't try to predict interest rate chances - I see a lot of downside risk vs not much upside ... Hedge funds I'm relatively neutral on ... Which, against real estate and commodities, makes them relatively appealing diversifiers
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Re: hedge funds dropping like flies

Post by Maynard F. Speer »

larryswedroe wrote:Maynard
All the data I have seen, including from SPIVA and academic studies show completely opposite finding to your claims for active managers. Perhaps it's because of bad benchmarks.

The recent SPIVA data looked at domestic funds across the global and for developed and emerging markets for last five years the average was about 20% of active funds outperformed. So don't know what data you are looking at, but almost assuredly it's wrong (the simple cost matters hypothesis and Sharpe's paper on math of active management show that your claim almost certainly cannot be correct)
Larry
UK active funds (investing predominantly in the UK) are well ahead on just about every measure we're commonly exposed to
http://www.trustnet.com/News/614906/act ... e-periods/

The maths works fine - about 30% of share ownership in the UK is through active funds, so all they've had to do recently is avoid energy and mining and have more exposure to smaller companies

I actually think the benchmarks we use underreport the disparity .. My own experience is of outperforming by about 300% by investing in Neil Woodford (our Warren Buffett) and Giles Hargreave ... But far from being insightful fund picking, these are just the fund managers everyone invests in ... I think you certainly need weighted indexes

Similarly our Absolute Return incides look terrible - worse than cash ... But half the market invests in a single fund (Standard Life GARS) which has done quite well ... So quite how you measure that?
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Re: hedge funds dropping like flies

Post by SimpleGift »

Maynard F. Speer wrote:UK active funds (investing predominantly in the UK) are well ahead on just about every measure we're commonly exposed to
http://www.trustnet.com/News/614906/act ... e-periods/
The problem, as always, is that it's not the same active funds that are outperforming in each period. Vanguard recently published a study of all active funds in the U.K. and found that, of the 287 highest performing active funds over the 5-year period ending December 2009, over 60% of them ended up in the three lowest performing quintiles or were liquidated/merged in the subsequent 5-year period, ending December 2014 (table below).

Image
Source: Vanguard U.K.

The lack of persistence in active manager outperformance appears no different in the U.K. than the U.S. — despite your apparent personal ability to always pick those active funds that consistently outperform in every time period, Maynard. :wink:
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Re: hedge funds dropping like flies

Post by Northern Flicker »

Maynard, your cited article & graph shows 5 months of overperformance of active UK portfolios relative to the FTSE 100 since mid-May, and subsequently has the following text:
Over the long term we have found that the average UK fund and the FTSE are pretty similar. There is not a lot to choose between them over the really long term. But you do get periods where active does better and passive does better.
A passive index fund generally does not risk underperforming the market (in theory, there is risk of failing to track the index), but an active fund does take the risk of significant market underperformance. Per the cited article, the active UK investor is not compensated over the long term for taking the risk of underperforming the market.

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Re: hedge funds dropping like flies

Post by Clive »

Simplegift wrote:The lack of persistence in active manager outperformance appears no different in the U.K. than the U.S. — despite your apparent personal ability to always pick those active funds that consistently outperform in every time period, Maynard. :wink:
Its not unreasonable to follow/diversify-across apparently good managers. Take for instance a combination of selecting Buffett (BRK-B), Rothschild (London:RCP that diversifies widely/globally with a healthy chunk of Private Equity) and a FT250 midcap (small in US scale) index tracker. For a UK investor (GB£) equally weighted yearly rebalanced of those three outpaced even Woodford in each of 16, 10, 5, 3 and 1 years, the only exception was 7 years when Woodford bettered that three way.

As a collective set however and things are different. The FT250 excluding Investment Trusts generally tends to outpace the FT250 index including IT's, which is indicative that collectively IT's lag.
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Re: hedge funds dropping like flies

Post by Maynard F. Speer »

Simplegift wrote:
Maynard F. Speer wrote:UK active funds (investing predominantly in the UK) are well ahead on just about every measure we're commonly exposed to
http://www.trustnet.com/News/614906/act ... e-periods/
The problem, as always, is that it's not the same active funds that are outperforming in each period. Vanguard recently published a study of all active funds in the U.K. and found that, of the 287 highest performing active funds over the 5-year period ending December 2009, over 60% of them ended up in the three lowest performing quintiles or were liquidated/merged in the subsequent 5-year period, ending December 2014 (table below).

Image
Source: Vanguard U.K.

The lack of persistence in active manager outperformance appears no different in the U.K. than the U.S. — despite your apparent personal ability to always pick those active funds that consistently outperform in every time period, Maynard. :wink:
I can't make head or tail of the statistical hall of mirrors that Vanguard study wants me to walk down - but consciously or unconsciously, I don't think they'd be the people to look to for objectivity .. (This is a firm who virtually have to cover up the fact own active funds are consistent outperformers)

In the other study, 5 years is barely a market cycle - were you to look at a known factor premium, such as value, you'd find something similarly cyclical and obscurative .. I use a lot of statistics, and 14-year-old me would've seen these as facile

But I'll also reemphaise the point, you need to weigh funds, not number them .. Neil Woodford has been a consistent outperformer since the 80s, and his AUM (naturally) account for a sizable chunk of the whole UK fund industry .. To say his success counts as a tick in the Good box, while the failure of a fund with barely $1m under management, run from the broom-cupboard of a small bank, with a silly fee and a manager plucked from the accounting department, counts as a tick in the Bad box .. completely distorts the experience of the average investor in any market ... We still have obscure index trackers with nearly 1.5% fees here - I think we're willing to overlook them
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Re: hedge funds dropping like flies

Post by larryswedroe »

Maynard
First, the math doesn't work as you say. Think of it this way, passive investors own their percent of those shares you say the active investors avoided, which by definition is literally impossible. By definition the active investors also must own collectively 30% of the shares of those sectors if they have 30% of the assets since passive investors say own the other 70%. Now unless you think that it's only the dumb retail active money that owns the remainder the math doesn't work. And my guess is that retail investors in UK own very small percentage of stocks directly, as is the case in US.

Second, unfortunately the SPIVA report doesn't break down by country but here's the data for Europe which shows the average active fund underperforms by 1.7% a year. I seriously doubt that UK active managers actually outperformed enough to overcome the remainder of the European active funds.

My only guess is that the data you are looking at is just plain wrong. And oh yes, the studies show very similar results when using either value weighted or equal weighted returns, with very small differences typically

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Re: hedge funds dropping like flies

Post by Maynard F. Speer »

larryswedroe wrote:Maynard
First, the math doesn't work as you say. Think of it this way, passive investors own their percent of those shares you say the active investors avoided, which by definition is literally impossible. By definition the active investors also must own collectively 30% of the shares of those sectors if they have 30% of the assets since passive investors say own the other 70%. Now unless you think that it's only the dumb retail active money that owns the remainder the math doesn't work. And my guess is that retail investors in UK own very small percentage of stocks directly, as is the case in US.

Second, unfortunately the SPIVA report doesn't break down by country but here's the data for Europe which shows the average active fund underperforms by 1.7% a year. I seriously doubt that UK active managers actually outperformed enough to overcome the remainder of the European active funds.

My only guess is that the data you are looking at is just plain wrong. And oh yes, the studies show very similar results when using either value weighted or equal weighted returns, with very small differences typically

Larry
Active investors, of course, but not necessarily UK-based active fund managers ... Here's a chart I just pulled up - the part of the market I'm talking about here accounts for less than 10% of UK share ownership (and presumably that includes passive funds)

Image

I believe our government still owns large stakes in the mining and energy sectors; insurance companies and banks tend to be appallingly bad market timers; individual share ownership seems to trump unit and investment trusts, at least in 2012 ... There's ample room for the maths to work ... Morningstar have been running the IMA sectors charts, and we're just used to seeing the active composite in every UK sector being the higher benchmark
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Re: hedge funds dropping like flies

Post by nedsaid »

larryswedroe wrote:Maynard
Few things
First hedge funds did generally well up to about 2002. It was relatively small industry and little capital employed in it. 20 years ago only about $300b. Today approaching 10x that.
Second, don't know if the indices you show are biased or not, and there are huge biases in data that can easily add up to 7% or more--liquidation bias, self reporting bias, instant history bias being just a few

Third, Bill Bernstein did study on hedge funds and broke 15 year period into three equal parts-first five years 98-02, big alpha. Next five years as cash flowed in slightly negative alpha. And next five years big negative alpha.

And finally as I noted the HFRX Global Hedge Fund Index underperformed every major asset class for last 10 years.

Larry
Bill Bernstein's study on hedge funds probably is consistent with the performance of big university endowments. David Swenson at Yale pioneered use of "alternative investments" for large endowment funds, he enjoyed great success but those who have tried to imitate him have not. It also might be a case of the early bird getting the worm. It also reminds me of the Buffett quote that fat wallets are the enemy of good returns.
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Re: hedge funds dropping like flies

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nedsaid wrote:Bill Bernstein's study on hedge funds probably is consistent with the performance of big university endowments. David Swenson at Yale pioneered use of "alternative investments" for large endowment funds, he enjoyed great success but those who have tried to imitate him have not. It also might be a case of the early bird getting the worm. It also reminds me of the Buffett quote that fat wallets are the enemy of good returns.
I think people overestimate the ability of the typical endowment manager .. I read in a lot of cases these are people with very little experience managing money, and I also read there can be quite a high turnover of managers, as board-members tend to fight them at every turn ... So - with a few exceptions - I don't think these are always paradigms of academic portfolio management

My hedge fund returns have been about the same as Yale's since around the mid-00s (in the region of 7-8%, but with very low correlation to anything) - and this has actually been very easy, as for most of this period there have been less than half a dozen hedge funds listed on the London Stock Exchange .. Mine being BH Macro, AllBlue and Ruffer .. The one I wish I'd bought back then was Third Point Offshore (but it didn't fit what I was looking for)

Where Yale do beat me (and most people) hands down is in private equity - both in allocation to (30%-ish) and in returns (I believe they've averaged around 30%, I'm around 17%) .. I think buying hedge funds and mutual funds is very simple (my active equity returns are possibly better Yale's), but private equity feels like a distant universe ... I think you need to know managers personally, and know the companies you're investing in face-to-face .. For the most part I substitute with micro-caps - although I'm intrigued by equity crowd-funding, as this might be the P2P lending to PE's bonds
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Re: hedge funds dropping like flies

Post by larryswedroe »

Maynard
I got it, the UK active industry is the one place in the world where they win. Unfortunately I have never seen an academic paper in peer reviewed journal that supports that view.

I guess it's theoretically possible that the rest of the active institutional market is so bad that the hedge fund industry in UK can extract profits from them and the dumb individual investors which are likely a very small percentage. But that clearly damns the active mutual fund industry as there has to be some victims and just not enough individuals left.

Seems to me that if you want to claim hedge funds in UK win then you have to also believe that the rest of the active industry is incredibly bad.

Larry
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Re: hedge funds dropping like flies

Post by Howard Donnelly »

Here's a related article with some recent thoughts from Warren Buffett:

"Warren Buffett: Why hedge funds fail"
http://www.marketwatch.com/story/warren ... 2015-10-16
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Re: hedge funds dropping like flies

Post by afan »

As best I can tell, hedge funds disappear at a higher rate than do actively managed mutual funds. I think this is in part because hedge funds, as a group, hold even more highly undiversified portfolios and hence have more extreme performance. When that extreme performance is negative, or lags peers, hedge fund investors are particularly fast to pull out. The industry encourages unrealistic expectations about performance. Plus this behaving looks like a reaction to the illiquid nature of the investment. If things are going really badly, and the current downturn might be the tip of the iceberg, then it is best to get out when the getting is good. I suspect the lack of lockup periods for classic open ended mutual funds lets investors be a bit more patient.

I doubt the difference is the fee structure. Presumably those who invest in hedge funds reconcile themselves to the fees before they get in. People who put money in loaded mutual funds or use investment advisors to manage even no load funds may be paying fees that overlap those paid by hedge fund investors. The combination high expense ratios and the advisors cut can easily get the annual expense above 2%, even before loads. Not every hedge fund can charge a 20% performance cut. That depends on marketing.
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Re: hedge funds dropping like flies

Post by VictoriaF »

backpacker wrote:
larryswedroe wrote:hedge funds dropping like flies
That's what we need. A Bogleheads® hedge fund swatter. Or maybe a few Venus hedge fund traps.
At the Bogleheads conference this week, Vanguard's Joel Dickson joked that for Halloween, hedge funds dress up as indexes. An insider joke is that a prominent Boglehead did frontrunning on Dickson's joke.

Victoria
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Re: hedge funds dropping like flies

Post by afan »

larryswedroe wrote:Maynard
Unfortunately I have never seen an academic paper in peer reviewed journal that supports that view.

Larry
Although absence of evidence is not evidence of absence, this would be irresistible to the academics. If it were true that there is a major country in the developed world where a large and deep stock market routinely lets active managers beat the market weighted index it would generate an endless stream of studies. As we keep pointing out, constructing an index that is free of bias is hard. If your source does not include an extended discussion of how they went about eliminating misleading biases, you can assume they did not bother. You can also assume their conclusions are meaningless.

The studies I have seen of the UK focussed on serial autocorrelation rather than passive vs active returns.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama
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Re: hedge funds dropping like flies

Post by afan »

A real paper. Guess what is shows about UK funds?

MUTUAL FUND PERFORMANCE: MEASUREMENT AND EVIDENCE1
Keith Cuthbertson*, Dirk Nitzsche* and Niall O’Sullivan**
Published in Journal of Financial Markets, Instruments and Institutions (2010), 19(2), 95-
187.

http://www.cassknowledge.com/sites/defa ... idence.pdf

A hint
Results on survivorship bias for UK funds is sparse but Quigley and Sinquefield (2000) using UK
data over 1978-1997 (751 funds) report a survivor premium of 2.31% p.a. and a survivorship bias
of 0.7% p.a., the latter being very close to that found by Blake and Timmermann (1998).
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Re: hedge funds dropping like flies

Post by SeeMoe »

VictoriaF wrote:
backpacker wrote:
larryswedroe wrote:hedge funds dropping like flies
That's what we need. A Bogleheads® hedge fund swatter. Or maybe a few Venus hedge fund traps.
At the Bogleheads conference this week, Vanguard's Joel Dickson joked that for Halloween, hedge funds dress up as indexes. An insider joke is that a prominent Boglehead did frontrunning on Dickson's joke.

Victoria
Ha, Ha, that's a good one . Hedge Funds still appear to have a lot of high end investors though, despite costs, and don't hear much complaining from them either,... :?:
"By gnawing through a dike, even a Rat can destroy a nation ." {Edmund Burke}
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Re: hedge funds dropping like flies

Post by Maynard F. Speer »

larryswedroe wrote:Maynard
I got it, the UK active industry is the one place in the world where they win. Unfortunately I have never seen an academic paper in peer reviewed journal that supports that view.

I guess it's theoretically possible that the rest of the active institutional market is so bad that the hedge fund industry in UK can extract profits from them and the dumb individual investors which are likely a very small percentage. But that clearly damns the active mutual fund industry as there has to be some victims and just not enough individuals left.

Seems to me that if you want to claim hedge funds in UK win then you have to also believe that the rest of the active industry is incredibly bad.

Larry
Certainly not the only place ... In Malkiel's lecture on investment opportunities in China (available on YouTube), he suggests an enormous disparity between active fund returns and passive indexes a few years ago - subsequently he himself uses active funds for these regions

I think the UK is a very good environment for active management ... We're very conservative; we like familiarity and tend to stick with managers through thick and thin; reputation and integrity are paramount; we've got the AIM index (effectively a liquid private equity index); our FTSE100 index receives only about 23% revenues from the domestic economy, and has very high weightings in energy and mining - making it a poor way to invest in the UK

So you could perfectly well make the case that a monkey would have a particularly easy time beating the market over here (I believe they still do in the US) because any tilt towards smaller (more domestically focused) companies or sectors that haven't been beaten down in recent years would give you every opportunity ... And by extension make the case that we're all using the wrong benchmarks

We also don't have things like value indexes - I'm not sure there is a UK value ETF, and only about 7% of active funds target value stocks .. So when I spotted a new fund not long ago called Miton UK Value, and saw these incredible PEG ratios, I invested immediately and it's been the top performer in the sector ever since - in many ways I think our market resembles the US in Graham's era

My own experience leads me to believe active fund performance is a fairly poor indicator of market inefficiency, and the problems active managers have in the US are principally institutional in nature
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Re: hedge funds dropping like flies

Post by larryswedroe »

maynard
The problem seems to be bad benchmarks, that's my guess. The active community persistently chooses benchmarks that are wrong but easy to beat. Like owning value stocks or small stocks and claiming outperforming S&P here in US. But while you could do that in old single factor world, by 1993 that was gone.

Also Malkiel, as much as I respect him, has been dead wrong on China, making the error of confusing growth rates in a country with stock returns--which have been awful in China for a very long time

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Re: hedge funds dropping like flies

Post by nedsaid »

larryswedroe wrote:maynard
The problem seems to be bad benchmarks, that's my guess. The active community persistently chooses benchmarks that are wrong but easy to beat. Like owning value stocks or small stocks and claiming outperforming S&P here in US. But while you could do that in old single factor world, by 1993 that was gone.

Also Malkiel, as much as I respect him, has been dead wrong on China, making the error of confusing growth rates in a country with stock returns--which have been awful in China for a very long time

Larry
I think Maynard has hit on a pretty good point. Many economies around the world are not as diversified as the US economy. Where I a UK investor, I would probably use index funds or ETF's within the so-called Anglosphere as my "domestic allocation" to get around this problem. Ditto for Canadian investors whose stock market is concentrated in just four industry groups. It sounds like the UK indexes are too weighted towards too few companies and too few sectors. Even in the United States, half of the market weight of the Total US Stock Market is concentrated in only 100 companies. That being said, it sounds like the US Indexes are much more diversified investments than those of the UK or Canada.

It might be that these indexes aren't too hard to beat if by nothing else overweighting your investments in smaller companies.

If I were a UK or Canadian investor, my "domestic portfolio" would speak English. That is that I would have funds in UK, Canadian, Australian, New Zealand, and US Indexes. My "foreign" indexes would be the broad European and Asian indexes maybe with a bit of Latin America sprinkled in.

As a US investor, I want to be invested all over the world. I want broader diversification than just the United States.
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Re: hedge funds dropping like flies

Post by Maynard F. Speer »

larryswedroe wrote:maynard
The problem seems to be bad benchmarks, that's my guess. The active community persistently chooses benchmarks that are wrong but easy to beat. Like owning value stocks or small stocks and claiming outperforming S&P here in US. But while you could do that in old single factor world, by 1993 that was gone.

Also Malkiel, as much as I respect him, has been dead wrong on China, making the error of confusing growth rates in a country with stock returns--which have been awful in China for a very long time

Larry
Certainly if you used a more equal-weighted benchmark (perhaps equal parts large, mid and small-caps) - which would reflect typical UK active fund composition better - you'd be back to most funds not beating the index

But to me it seems very academic whether you'd call that active vs passive ... I'd perhaps go for flexible vs systematic (and in practice perhaps just high fee/low fee, were systematic available) ... Factor investing seems a bit like the way we've gone from a magical view of the world to a scientific one, not by disproving magic but rather by reclassifying most of it as science .. I still argue there's only one real passive benchmark

Must say I'm still on the fence when it comes to China
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Re: hedge funds dropping like flies

Post by burt »

When it comes to hedge funds I think of the "Vig".

"Vigorish, or simply the vig, also known as juice, the cut or the take, is the amount charged by a bookmaker, or bookie, for taking a bet from a gambler. In the United States, it also means the interest on a shark's loan. The term originates from the Russian word for winnings, выигрыш vyigrysh.[1] Bookmakers use this practice to make money on their wagers regardless of the outcome. "

burt
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Re: hedge funds dropping like flies

Post by larryswedroe »

nedsaid and maynard
The right benchmark, as used in all academic papers, isn't some market like index or even asset class index but how did fund add value based on the risks it took. Factors that explain returns and their exposure to them.
So for example we know that more active large funds tend to outperform S&P 500 when small outperforms and vice versa (Dunn's Law of purity at work). But that's not alpha it's simply beta. Though the active crowd claims alpha.
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Re: hedge funds dropping like flies

Post by Maynard F. Speer »

larryswedroe wrote:nedsaid and maynard
The right benchmark, as used in all academic papers, isn't some market like index or even asset class index but how did fund add value based on the risks it took. Factors that explain returns and their exposure to them.
So for example we know that more active large funds tend to outperform S&P 500 when small outperforms and vice versa (Dunn's Law of purity at work). But that's not alpha it's simply beta. Though the active crowd claims alpha.
Larry
But isn't any systematic strategy vulnerable to being academicalised(?) into beta? (this is something I've wondered)

When Buffett was arguing for the existence of a value premium (in the Superinvestors of Graham and Doddsville) it sounded a lot like a conflict between active and passive, or efficient and inefficient market proponents .. A mid-cap value index is essentially a stock screen with buy and sell rules, and liquidity requirements, and sounds a lot like how Graham was investing .. Is there a limit to how convoluted or abstract a factor may be, and do we just consider alpha uncharted waters?

For me it seems more logical to say 'the market' is simply all financial risk assets held in the proportion the market holds them, and any deviation - whether a tilt towards stocks, towards value, or towards a local car factory - is an active decision, and a deviation from the market return
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Re: hedge funds dropping like flies

Post by long_gamma »

^^^ I agree.

Another example is trend trading. It is practiced by traders for eons. But now that can be explained away by Momentum factor beta. When the traders placed those trades, there is nothing passive about it.

With the myriad of factors in the zoo, everything can be explained away.
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Re: hedge funds dropping like flies

Post by larryswedroe »

Maynard
That is EXACTLY the point made in my new book, The Incredible Shrinking Alpha.If it's systematic, it's not alpha once you uncover the factor that can be systematized. If it's systematic it can be replicated, duplicated, and thus it is not skill.

What researchers look for is to see if superior performance was result of skill (alpha) or could be duplicated by simply gaining exposure to some systematic factor that could be replicated. So you study top performers and see if you can find some systematic factor. And you discover a value premium determined by various metrics which all worked, some better than others. But then what was once alpha is converted into beta.

Now that takes nothing away from the practitioners who were earning alpha up to that point as they discovered the "secret sauce" before others and exploited it. And since alpha is a scarce resource you can charge a lot for it. But beta is cheap and you cannot charge lot for it because basically it's a commodity. And that is why index funds are very cheap and well structured passively managed funds which add some value are more expensive but still relatively cheap.

The CAPM was only able to explain 2/3 of differences in returns of diversified portfolio. So there was plenty of room for alpha still and at the time a huge herd of sheep (victims) available and waiting to be sheered. But that world changed dramatically in 1992 with the three-factor model and quickly followed by lots of passive funds that invested in these systematic factors. Now we could explain about 90% or bit more of differences, so sources of alpha were shrinking, at same time the competition started to get much tougher as you had all these MBA in finance and PHDs entering the finance world with the knowledge and computer power behind them. And then you got MOM adding in 1997. And explanatory power went to mid 90s, leaving very little room for other factors to really add much more value (even if show big premiums in isolation). Then we added profitability. And there is not only very little room for any alpha but we now have about $2.5T of hedge funds up from $300b 20 years ago, but we have about 8,000 mutual funds and very tough competition.

Converting what was once alpha into beta is real problem for active world. And great for investors who can now invest basically the same way the great investors did, but don't have to pay much for that privilege because their skill, which was in identifying these factors before others, was converted into beta.

That's the huge story here. Almost all hedge funds just give you beta, not alpha, when measured properly. Now twenty years ago it was alpha, but no longer.

Perhaps the best example is Buffett. We now have two papers, betting against beta and Buffett's alpha that both found that Buffett's skill wasn't individual stock picking, but two things. One, identifying the two key factors (value and profitability/quality) way before the academics did, and two never engaging in panic selling. Now all the funds we use have exposure to those factors. Again, this takes nothing away from Buffett at all. He discovered (or Graham and Dodd did) the factors 50 years before the academics. But today that isn't alpha any longer. It's a systematic factor, beta

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Re: hedge funds dropping like flies

Post by Maynard F. Speer »

larryswedroe wrote:Maynard
That is EXACTLY the point made in my new book, The Incredible Shrinking Alpha.

What researchers look for is to see if superior performance was result of skill (alpha) or could be duplicated by simply gaining exposure to some systematic factor that could be replicated. So you study top performers and see if you can find some systematic factor. And you discover a value premium determined by various metrics which all worked, some better than others. But then what was once alpha is converted into beta.

Now that takes nothing away from the practitioners who were earning alpha up to that point as they discovered the "secret sauce" before others and exploited it. And since alpha is a scarce resource you can charge a lot for it. But beta is cheap and you cannot charge lot for it because basically it's a commodity. And that is why index funds are very cheap and well structured passively managed funds which add some value are more expensive but still relatively cheap.

The CAPM was only able to explain 2/3 of differences in returns of diversified portfolio. So there was plenty of room for alpha still and at the time a huge herd of sheep (victims) available and waiting to be sheered. But that world changed dramatically in 1992 with the three-factor model and quickly followed by lots of passive funds that invested in these systematic factors. Now we could explain about 90% or bit more of differences, so sources of alpha were shrinking, at same time the competition started to get much tougher as you had all these MBA in finance and PHDs entering the finance world with the knowledge and computer power behind them. And then you got MOM adding in 1997. And explanatory power went to mid 90s, leaving very little room for other factors to really add much more value (even if show big premiums in isolation). Then we added profitability. And there is not only very little room for any alpha but we now have about $2.5T of hedge funds up from $300b 20 years ago, but we have about 8,000 mutual funds and very tough competition.

Converting what was once alpha into beta is real problem for active world. And great for investors who can now invest basically the same way the great investors did, but don't have to pay much for that privilege because their skill, which was in identifying these factors before others, was converted into beta.

That's the huge story here. Almost all hedge funds just give you beta, not alpha, when measured properly. Now twenty years ago it was alpha, but no longer.

Larry
Larry, thanks for taking the time to explain - always a pleasure

I suppose where this still feels slightly counter-intuitive to me is when we say 'alpha is shrinking', it sounds like we're saying opportunities to outperform are all being arbitraged away ... When what we're strictly saying is that the definition of alpha is shrinking

As an investor this seems academic .. My hedge funds did fairly well through 2007-09, and I don't know how much of that was down to systematic beta (relative value and systematic trend-following account for a large part of what these funds do) .. But I'm fairly sure it's still cheaper (and safer) for me to pay 1.5/15 than it would be to run my own leveraged, quant-style long and short positions

Were QSPIX easily available here, I think it might be a no-brainer

And I was going to say the reason I use active funds is primarily because we don't really have UK value ETFs, let alone value mid-caps or momentum .. And I'm glad we don't .. Because I think my active returns are much better than they would be were value more easily accessible
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Re: hedge funds dropping like flies

Post by Hodor »

If you're talking about Warren Buffett's alpha, it's important to keep in mind that he is buying companies, not stock. Berkshire can sometimes get companies cheaper than private equity or others could because being bought out by Berkshire is a relatively good deal. They don't come in and fire management and half the workforce. They don't push them to grow, grow, grow. They buy companies they like and tell them to keep doing what they're doing and send the profits down to Omaha. It's not clear that anyone other than Berkshire could necessarily buy the companies they do at the prices they do consistently.
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Re: hedge funds dropping like flies

Post by nedsaid »

Larry, I remember some time ago there was a lively discussion between you and Rick Ferri about the meaning of beta. As I recall, Rick defined beta as market exposure. Most people used the S&P 500 as the benchmark and any excess performance over the S&P 500 was defined as alpha. That was the definition that I had always understood. You said that beta was exposure to factors. As I recall, the equivalent of a bar room brawl ensued in that thread. It was an interesting discussion.

As an investor, I was factor investing for years without realizing it. Primarily, I was a value investor but also held mutual funds that practiced earnings and price momentum. I also liked smaller and mid-sized stocks. I had done this for years and after reading many threads here at Bogleheads wondered if I was doing the right thing. From what you have been saying, I was doing what the academics said was exactly right. I don't know if I actually captured any premiums doing this but I did achieve some diversification benefit.

I am not a quant but when you own investments you can hardly keep from noticing certain things. I liked the idea of buying cheap assets on sale and my brokers taught me a lot about value investing. I also liked dividends (in part because it helped cover brokerage commissions and also was money that I could reinvest). By golly, I noticed that growth and value did really well at different times. I noticed that smaller stocks over time tended to do better than larger stocks but with the price of more volatility. I noticed that earnings and price momentum did really well in some markets and lagged in others. I could see the teeter-totter effect between momentum and value. This was before I discovered academic research thanks to the Merriman folks. As Yogi Berra once said, "You can observe a lot by watching."

So as you say, factors explain 95% or so of market performance. The thing is, people who invested and had their eyes and ears open either knew this or suspected it. It was sort of something that you just knew even though the evidence wasn't so easy to get to as it is today. There just was not the volume of academic studies regarding investment performance as there is presently.

Beta grows and grows and alpha shrinks and shrinks. You beta believe it.
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Re: hedge funds dropping like flies

Post by nedsaid »

larryswedroe wrote:
Perhaps the best example is Buffett. We now have two papers, betting against beta and Buffett's alpha that both found that Buffett's skill wasn't individual stock picking, but two things. One, identifying the two key factors (value and profitability/quality) way before the academics did, and two never engaging in panic selling. Now all the funds we use have exposure to those factors. Again, this takes nothing away from Buffett at all. He discovered (or Graham and Dodd did) the factors 50 years before the academics. But today that isn't alpha any longer. It's a systematic factor, beta

Larry
Larry, I am not saying you are wrong. In fact you mostly captured the "secret sauce." But there is always more to the story. Buffett was also making bets on management and this is something that you can't quantify. When he bought a company in whole or in part, he was very careful about picking companies with excellent management. And of course he had the good sense to leave the managers alone.

Let's say another genius came along with all of Buffett's analytical skills but who perhaps didn't have all of Buffett's skills with people. Let's say this fellow built something like another Berkshire-Hathaway. If his ego got in the way and decided to micro-manage his companies instead of leaving them alone, Berkshire 2.0 would not have had the success of 1.0.

In other works, Buffett was more than an investor who discovered factors before the academics did. He also was an excellent judge of people and an outstanding businessman. The guy knew how to turn a buck. The skills of a successful investor and a successful businessman have a lot of overlap but the two skill sets are not exactly the same. Buffett is like peeling away the layers of an onion, you peel away one layer and it seems like there is always more.
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Re: hedge funds dropping like flies

Post by larryswedroe »

nedsaid/hodor
I think you are both misunderstanding. The comparison isn't with BRK performance, but with the public holdings of BRK.

nedsaid,
this is the way it is discussed by financial community, not someone's opinion.
Beta is in it's most common use --from the CAPM days of single factor model--the exposure of a security or portfolio relative to the risk of the overall market (similar to vol, but it's SD x covariance with market).

Now as other factors were added the standard use of the term is now MARKET BETA and also BETA on a FACTOR. So a fund has a VALUE BETA or SIZE BETA. Meaning beta is the loading on each factor.

As to whether people knew or had eyes open, if it was that simple then we would have had the models long before we actually did. IMO and I'm just guessing here, it's confirmation bias showing up, or perhaps selective memory (how many other things did you think at some point but which turned out not to be true). And our memories are very selective and fool us.

Maynard
To clarify we have TWO separate and distinct issues going on.
First the SOURCES of alpha are disappearing, gone and forever. That is because they are now systematized and anyone can access them cheaply without any skill (accept in portfolio design perhaps, like adding screens or patient trading). So at one point you could claim alpha buying value stocks. Now you cannot, at least legitimately. Now to get alpha the value stocks you buy have to outperform the value benchmark---an index with the same loading on the value factor. Same for size, momentum and profitability/quality.

Second, and independent of the first, is that the competition for any remaining sources of alpha is growing increasingly more difficult. The level of competition is SO much greater. It's like the difference between Djocovic playing in first round in Grand Slam (where he hasn't lost a set in a decade) and his play say Federer in finals. 70 years ago Buffett was competing in market where 90% of stocks were owned by retail investors directly, "dumb money", sheep easily sheered. Today about 90% of trading is all done between institutional investors so Buffett is more likely competing against Goldman, SAC Capital, DE Shaw, Renaissance Tech, etc. And even DFA a passive shop hires world class scientists armed with all the advanced math skills and computer power at their disposal, and all the academic research. The competition is so much tougher. That's the paradox of skill. The tougher the competition the harder it is to generate performance that differentiates you much. (If haven't read The Incredible Shrinking Alpha you should at least consider doing so).

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Re: hedge funds dropping like flies

Post by nedsaid »

larryswedroe wrote:nedsaid/hodor
I think you are both misunderstanding. The comparison isn't with BRK performance, but with the public holdings of BRK.

Nedsaid: Thanks for the clarification. We have to remember that Berkshire-Hathaway is an actual operating company and not just a glorified mutual fund.

nedsaid,
this is the way it is discussed by financial community, not someone's opinion.
Beta is in it's most common use --from the CAPM days of single factor model--the exposure of a security or portfolio relative to the risk of the overall market (similar to vol, but it's SD x covariance with market).

Nedsaid: I remember looking at the ValueLine research and seeing beta listed for each stock. That is how the stock fluctuated in relation to the S&P 500. That was the common definition. I was just at the investopedia website and the little video there talked about beta being a measure of the volatility of a stock in comparison to the market as a whole. There was no mention of factors. This was the whole discussion you and Rick Ferri had.

I think the definition has changed over time. If beta is now discussed in the context of exposure to factors and the changed definition is accepted by the financial community, then I accept that and won't argue. Rick Ferri didn't agree and there was a pretty lively discussion between the two of you about it.


Now as other factors were added the standard use of the term is now MARKET BETA and also BETA on a FACTOR. So a fund has a VALUE BETA or SIZE BETA. Meaning beta is the loading on each factor.

As to whether people knew or had eyes open, if it was that simple then we would have had the models long before we actually did. IMO and I'm just guessing here, it's confirmation bias showing up, or perhaps selective memory (how many other things did you think at some point but which turned out not to be true). And our memories are very selective and fool us.

Nedsaid: I don't claim to have discovered anything. But I just couldn't help but notice certain things and I am certain that I am not the only one who noticed them. I didn't become aware of the academic research until about 2007 when I went to a Merriman seminar. They talked about the French/Fama research and it just resonated with me. It was consistent with what I had experienced as an investor.

If Merriman had said that chasing performance and buying the hot thing was the way to market outperformance, I would have just told them to get out of town! Particularly if they had a list of the hottest new IPO's to invest in.

There were certainly new things that the Merriman folks taught me that came from academic research but the point is it didn't go against the grain of everything that I knew and had experienced as an investor. The academic research was also very consistent with what I know about human nature and human behavior.

Momentum has been known about for a long time probably since the 1920's. I remember the research reports from my former brokerage company that talked about momentum on each of the stocks that were recommended. Value has been known about at least since Benjamin Graham. Quality has been known about for a long time. These things were either known about or suspected for a long time. Otherwise, how did the investment styles come about? As far back as I can remember, you had the value guys, the momentum guys, the blue chip guys, the growth guys, the growth at a reasonable price guys. I have missed a few but you get the idea.

My guess is that people found that certain things worked. Maybe it didn't work all the time but enough of the time that people were satisfied with the investment results. Folks copied Benjamin Graham and found that value worked. Other folks found there was something to momentum. Other folks found that investing in large companies with consistently growing earnings worked well.

You have to take into account that we didn't have the benefit of computers to do all this number crunching until recent decades. This is what I mean that things were suspected but perhaps not known for certain. Certain investment practices just seemed to work.

You are right, the models you discuss didn't exist until the academic research. Whatever the investment companies used for models were probably very crude in comparison and didn't have near the explanatory power.

I don't think the academics really discovered anything that was completely unknown before, I think they better described and provided better evidence behind the factors. As the research became published, the public had a better understanding of this. My guess is that the investment community knew or suspected that the factors existed but it took the academics to better describe them, provide better evidence for their existence, and create models that used factors to explain market performance.

Benchmarks and indexes have existed for a long time but until the mid 1970's, no one could invest in them. So if an investment style worked fairly well but didn't quite perform up to the index, that was okay because almost no one could invest in the indexes anyway. What the academics were able to identify were factors (investment styles) that actually could beat the broad market over time. A style that got 95% of the market return was no longer good enough after the broad indexes became available to invest in.

Certainly, academic research had a big influence on investment companies. It used to be that you would buy a "stock" fund or a "bond" fund. Now funds are like Ben and Jerry's or Baskin and Robbins. You can get funds in every imaginable flavor. The flavors were probably in response to large clients who became aware of the research. At some point, smaller clients were demanding more flavors as well.


Maynard
To clarify we have TWO separate and distinct issues going on.
First the SOURCES of alpha are disappearing, gone and forever. That is because they are now systematized and anyone can access them cheaply without any skill (accept in portfolio design perhaps, like adding screens or patient trading). So at one point you could claim alpha buying value stocks. Now you cannot, at least legitimately. Now to get alpha the value stocks you buy have to outperform the value benchmark---an index with the same loading on the value factor. Same for size, momentum and profitability/quality.

Second, and independent of the first, is that the competition for any remaining sources of alpha is growing increasingly more difficult. The level of competition is SO much greater. It's like the difference between Djocovic playing in first round in Grand Slam (where he hasn't lost a set in a decade) and his play say Federer in finals. 70 years ago Buffett was competing in market where 90% of stocks were owned by retail investors directly, "dumb money", sheep easily sheered. Today about 90% of trading is all done between institutional investors so Buffett is more likely competing against Goldman, SAC Capital, DE Shaw, Renaissance Tech, etc. And even DFA a passive shop hires world class scientists armed with all the advanced math skills and computer power at their disposal, and all the academic research. The competition is so much tougher. That's the paradox of skill. The tougher the competition the harder it is to generate performance that differentiates you much. (If haven't read The Incredible Shrinking Alpha you should at least consider doing so).

Nedsaid: I have been investing only since 1984 and I have noticed the increase in interest by the public, the increased computing power available to investment companies, and the influx of extremely bright people into the investment world. You are absolutely right that the level of competition has increased tremendously. That is a big reason that I am indexing more and more of my money all the time. The low hanging fruit was picked a long time ago and now the competition is so fierce it seems like they are fighting over table scraps.

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Re: hedge funds dropping like flies

Post by nedsaid »

I don't want to be like Al Gore and claim that I invented the internet.

There were things about factor investing that I knew or suspected before learning about the academic research but there was one key thing that I didn't know. When I went to the Merriman seminars back in 2007-2008, I learned about small/value tilting. I liked smaller stocks and I liked value stocks but it had never occurred to me to buy any small value funds or ETFs. That was a big concept that had never occurred to me.

The smaller stocks I liked were more like mid-caps. There were a couple of funds in this space that I really liked but they were growth funds and not value funds. Indeed a review of my portfolio done by of all things by my insurance company showed that I was very low in actual small cap stocks. What I had were mid-caps. So in 2004, I bought the S&P Small-Cap 600 ETF. After attending the Merriman seminars in 2007-2008, I increased my weightings of mid-cap/small cap. For the first time, I purchased mid-cap/small-cap funds in the International space.

So while the academic research reinforced much of what I already knew or suspected, it did affect my portfolio construction as I learned more. Certainly, I had been unaware of small/value tilting.

I certainly did not invent factor investing. Like Yogi Berra, I observed a lot by watching.
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Re: hedge funds dropping like flies

Post by afan »

Regarding beta: This is standard terminology in regression, long before anyone applied it to finance.

Beta is simply the regression coefficient on a variable. Each variable in a regression has its own coefficient. One variable- one beta. Two variables- two betas.

In the original CAPM there was only one variable, the market return, so there was only one beta and it was presumed to reflect all the risk that mattered. This meant that one could capture all risk in a single measure- the sole beta in the equation.

When you introduce more variables, more factors, each gets its own beta. In the single variable model beta and standard deviation are essentially equivalent measures of risk. Since the more recent models include multiple variables, the regression coefficient is no longer interpreted as a measure of risk. For that one looks to variance, skewness, and higher moments.
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Re: hedge funds dropping like flies

Post by Maynard F. Speer »

I was amazed when I discovered factor investing, and that it was quite accepted by the same crowd who'd relentlessly argued with me that Warren Buffett's returns had been a 'five-sigma event' (a pure statistical anomaly)

It felt like being shunned by your school friends for getting into punk music, then coming back to your home town a year later to find everyone wearing leather jackets and Mohawks

In the UK we still call any return in excess of the index (large, mid, small-cap or all-share) 'alpha' ... Presumably good for the active fund industry; but I'm sure the ETF industry will want a piece of that
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Re: hedge funds dropping like flies

Post by larryswedroe »

Maynard
In the UK we still call any return in excess of the index (large, mid, small-cap or all-share) 'alpha'
And you still have a king and queen (:-))

Note it doesn't matter what you in UK call it, it's what it IS. A rose by any other name is still a rose. And beta is loading on a factor and comparing apples to oranges isn't right, no matter what you call it. It only allows the fund industry to keep extracting fees without adding value.

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Re: hedge funds dropping like flies

Post by larryswedroe »

Nedsaid
If you don't believe me, or Afan re definition of beta here's a standard textbook definition of regression terms -I'll let you decide whether I was correct or not
http://onlinestatbook.com/2/regression/ ... ssion.html

Clearly we can disagree on issues like whether to buy high yield bonds or not, or other asset types. One can examine the evidence, the pros and cons and come to their own conclusions. But there are definitions that are common usage and thus not opinions.

Best wishes
Larry
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Maynard F. Speer
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Re: hedge funds dropping like flies

Post by Maynard F. Speer »

larryswedroe wrote:Maynard
In the UK we still call any return in excess of the index (large, mid, small-cap or all-share) 'alpha'
And you still have a king and queen (:-))

Note it doesn't matter what you in UK call it, it's what it IS. A rose by any other name is still a rose. And beta is loading on a factor and comparing apples to oranges isn't right, no matter what you call it. It only allows the fund industry to keep extracting fees without adding value.

Best wishes
Larry
I think we're quite lucky we've still got a monarchy - if our elected leaders were our national figureheads, it's safe to say we'd be much less popular

The way I see it though, the fact we don't have UK small-cap value ETFs means big institutional investors haven't lazily arbitraged all these inefficiencies away .. There's still value in research and fundamental analysis - I think it's a much easier environment to be a David Swensen

Add to this most of our investing literature comes from the US, so we've got funds like City Financial Absolute Equity (one of my favourite holdings) which have averaged about 25% returns for the past 4-5 years (30% this year), and yet money's flooding into index trackers ... If the secret to investing is finding inefficiencies and places where you've got an advantage, I think the UK's a very favourable environment .. (plus we have some very cheap active funds - there's a new trend for having no management fee whatsoever)
"Economics is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions." - John Maynard Keynes
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Re: hedge funds dropping like flies

Post by larryswedroe »

maynard
I don't know the UK market well and since the passive revolution hasn't caught on as much in the UK perhaps the pool of dumb money (retail) is still large enough to exploit and generate after costs alpha, but I seriously doubt it, not if measured properly. Hard to believe that the UK has one type market when rest of developed world doesn't (as explained the non-US developed world shows 80% of active investors losing even before taxes, so likely 90% after taxes)
Larry
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Maynard F. Speer
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Re: hedge funds dropping like flies

Post by Maynard F. Speer »

larryswedroe wrote:maynard
I don't know the UK market well and since the passive revolution hasn't caught on as much in the UK perhaps the pool of dumb money (retail) is still large enough to exploit and generate after costs alpha, but I seriously doubt it, not if measured properly. Hard to believe that the UK has one type market when rest of developed world doesn't (as explained the non-US developed world shows 80% of active investors losing even before taxes, so likely 90% after taxes)
Larry
Well I think the US must be extremely scrutinised ... The rest of the world must resemble the US market at various points in history

Where I notice a big difference is in ETF/fund fundamentals .. I'm a fan of PEG ratios - value relative to growth .. If I look at a fund on MorningStar, and divide P/E by forecast growth, the S&P 500, Small-Cap Value and Small-Cap Growth come out with very similar ratios ... All in the region of 1.8 (at my most recent browse) - which suggests to me markets are pricing in growth incredibly well (and that people are paying too much for it)

In the UK, our indexes sit between about 1.4 and 1.8, but if you take a small-cap value fund (such as Miton UK Value) PEG ratios drop to 0.5-0.7 .. Which to me suggests the market isn't fully pricing in even information it has about itself .. You get this wide disparity in emerging markets, such as India, too .. And from charts I've seen, I think you can lump in publicly owned and much institutional share ownership with the dumb money
"Economics is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions." - John Maynard Keynes
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nedsaid
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Re: hedge funds dropping like flies

Post by nedsaid »

larryswedroe wrote:Nedsaid
If you don't believe me, or Afan re definition of beta here's a standard textbook definition of regression terms -I'll let you decide whether I was correct or not
http://onlinestatbook.com/2/regression/ ... ssion.html

Clearly we can disagree on issues like whether to buy high yield bonds or not, or other asset types. One can examine the evidence, the pros and cons and come to their own conclusions. But there are definitions that are common usage and thus not opinions.

Best wishes
Larry
Thanks, Larry. Above afan wrote a good explanation of beta. I didn't realize that is was not a unique term to finance. I also didn't realize that beta had a certain meaning because in the old days, there was only one factor. Now there are several I guess now you have to convince Rick Ferri.

Best wishes,

Ned
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Barry Barnitz
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Re: hedge funds dropping like flies

Post by Barry Barnitz »

Hi:

Recent study on the SSRN Financial Economics Network:

Blake, David P. and Caulfield, Tristan and Ioannidis, Christos and Tonks, Ian, New Evidence on Mutual Fund Performance: A Comparison of Alternative Bootstrap Methods (October 1, 2015). Available at SSRN: http://ssrn.com/abstract=2676619
Abstract:
We compare two bootstrap methods for assessing mutual fund performance. Kosowski, Timmermann, Wermers and White (2006) produces narrow confidence intervals due to pooling over time, while Fama and French (2010) produces wider confidence intervals because it preserves the cross-correlation of fund returns. We then show that the average UK equity mutual fund manager is unable to deliver outperformance net of fees under either bootstrap. Gross of fees, 95% of fund managers on the basis of the first bootstrap and all fund managers on the basis of the second bootstrap fail to outperform the luck distribution of gross returns.
regards,
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