Larry Swedroe: Why Do Hedge Funds Exist?

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Random Walker
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Larry Swedroe: Why Do Hedge Funds Exist?

Post by Random Walker » Sun Oct 22, 2017 11:54 pm


Nate79
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Re: Larry Swedroe: Why Do Hedge Funds Exist?

Post by Nate79 » Mon Oct 23, 2017 12:08 am

I'm not sure he answered the question. Why do hedge funds exist?

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nedsaid
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Re: Larry Swedroe: Why Do Hedge Funds Exist?

Post by nedsaid » Mon Oct 23, 2017 12:09 am

Hedge funds are at the intersection of snob appeal, terrific marketing, and poor investment performance. As the joke goes, the firm made money and the broker made money, and two out of three ain't bad. The investor is out of luck. Certainly there are successful hedge funds out there but they are in the minority.
A fool and his money are good for business.

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TD2626
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Re: Larry Swedroe: Why Do Hedge Funds Exist?

Post by TD2626 » Mon Oct 23, 2017 12:14 am

This article, which discusses the underperformance of hedge funds, shows that just because the really, really wealthy have access to something "ordinary" investors don't have access to doesn’t make it good. Unique access to something does not mean it's a free lunch. These speculative assets (I am shying away from calling them investments) probably simply exist in many cases to make the uber-rich feel special, in my opinion.

The regulations of the '40 act are there to protect ordinary investors in retail mutual funds. Why one would forgoe the security of these kinds of important and basic protections is puzzling. Hedge funds are extremely risky and have very, very high expense ratios. They suggest that markets are fairly efficient - you can't reliably beat market averages even with enormous amounts of funding and professional, expert researchers and traders. Hedge fund managers may be making a lot in certain case, but are they keeping what they make for themselves?

Kudos to Larry for writing this article. It is a puzzle why these sorts of investments exist to the extent that they do.

Tanelorn
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Re: Larry Swedroe: Why Do Hedge Funds Exist?

Post by Tanelorn » Mon Oct 23, 2017 12:54 am


Longtermgrowth
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Re: Larry Swedroe: Why Do Hedge Funds Exist?

Post by Longtermgrowth » Mon Oct 23, 2017 2:51 am

I'm going to click on the link after typing this reply. Because rich kids don't know what to do, and are too rich to care?

Edit: Yes, after reading, I still think one would have many times expected life expenses if investing in such a fund. Especially if aware of such things explaining the inefficiencies. Though it seems if aware, they may also have a strong belief in market timing along with active management.

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TinkerPDX
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Re: Larry Swedroe: Why Do Hedge Funds Exist?

Post by TinkerPDX » Mon Oct 23, 2017 4:33 am

Isn't a hedge fund traditionally to make money in other than long positions - i.e. to be able to profit in bad markets? Of course they get beat when the market does great. Curious what that index's performance looked like on prolonged weak/bear markets.

Longtermgrowth
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Re: Larry Swedroe: Why Do Hedge Funds Exist?

Post by Longtermgrowth » Mon Oct 23, 2017 5:20 am

TinkerPDX wrote:
Mon Oct 23, 2017 4:33 am
Isn't a hedge fund traditionally to make money in other than long positions - i.e. to be able to profit in bad markets? Of course they get beat when the market does great. Curious what that index's performance looked like on prolonged weak/bear markets.
Seems like Warren Buffett's bet would have gone another way, had that been the case: https://www.cnbc.com/2017/09/18/warren- ... s-ago.html

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packer16
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Re: Larry Swedroe: Why Do Hedge Funds Exist?

Post by packer16 » Mon Oct 23, 2017 6:56 am

First, there is no definition of hedge funds. Second, although it may be fun to make fun of others mistakes, I think hedge funds used in the right way do add some value. Heck even Larry uses hedge funds (with requisite high fees also) which invest in factors, re-insurance and P-to-P lending. I think it is fact & circumstance based & to paint a broad stroke about something without considering the circumstances where your strategy actual uses this type of fund is silly.

The key IMO is does the hedge fund provide something unique in terms of market exposure? Some areas of value add are in illiquid markets where there is a higher probability of mispricing. There are plenty of non-unique hedge funds out there that generate fees for the manager but the same can be said of many mutual funds.

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ramsfan
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Re: Larry Swedroe: Why Do Hedge Funds Exist?

Post by ramsfan » Mon Oct 23, 2017 8:18 am

I am not an expert on hedge funds, but a former work colleague was very excited to tell me about the hedge fund he was going to invest in. $250k minimum. I think it appealed to his ego that he could invest with the big dawgs.

He asked me what I thought, so I asked him to send me the information. The prospectus was 80+ pages long (first warning sign). However, in the early pages, it laid out that the fund would invest in a government issued bonds, mortgage backed securities, etc... It sounded a lot like Total Bond Market Index.

Then it got to the fees, which is the first time I saw "2 and 20". The annual fee was 2% of net assets, and 20% of investment performance above the target return. I read further, and it was described as 20% of any investment return above an absolute return".

Luckily, I looked up the definition of absolute return, which means any return above zero.

UGH...

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Re: Larry Swedroe: Why Do Hedge Funds Exist?

Post by Boglegrappler » Mon Oct 23, 2017 11:21 am

Hedge funds exist because they offer the hope of beating the market. Some have done it.

Of course, if no one hoped to beat the market, it wouldn't matter. But the world is full of investors who seriously desire to beat the market. Among them are many of the largest, ostensibly smartest, investing institutions in the country and world. Every pension fund is quite taken with the idea that if they could earn a couple of extra percent, they could lower the already unsustainable future burden on taxpayers (or shareholders, in the case of corporations). Universities with big endowments and bigger ambitions fall into this category too. Everyone needs a raise, and after all, we're rich enough to afford it, especially if we can earn 8-10% instead of just 7. (Actually, if you google some university investment reports and look at their "target" returns, you'll be stunned. They're much higher than what I just mentoned.)

The boglehead idea of living below your means doesn't really resonate with institutions who are already rich. They would be better off to resolve to simply live within their sustainable means. But most are run by people and pushed by forces whose concentration is on spending in the here and now, and not in the future.

So if you offer an investment product that offers a specific target to fit spending goals that these organizations have laid out, you'll have investors. And they aren't mom & pop rubes who've made small fortunes in the scrap business.

The bottom line is that ignorance and ambition can co-exist with otherwise reasonable intelligence.

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