In defense of Hedge Funds

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hdas
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In defense of Hedge Funds

Post by hdas » Wed Sep 19, 2018 3:52 pm

This article looks at the long term performance of hedge funds, after 28 years the score card doesn't look that bad, really.

Image

Some notes:

- HFs a lot less volatile than SP as expected
- Post 2008 HFs became very risk averse, however it's kind of their job to worry, ppl can get their risk through equity exposure.
- Once you add on top the cost of fund of hedge funds in order to capture something similar to the index, the performance of HFs gets worse

Cheers, :greedy
Last edited by hdas on Thu Sep 20, 2018 10:16 am, edited 2 times in total.
Stay the course and buy some more.

PharmerBrown
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Re: In defense of Hedge Funds

Post by PharmerBrown » Wed Sep 19, 2018 4:13 pm

hdas wrote:
Wed Sep 19, 2018 3:52 pm

- Once you add on top the cost of fund of hedge funds in order to capture something similar to the index, the performance of HFs gets worse
To say the least.....

Thesaints
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Re: In defense of Hedge Funds

Post by Thesaints » Wed Sep 19, 2018 4:16 pm

Is the graph to be interpreted by subtracting 0.04% per year from the S&P and 2+20 from the hedge fund ?

hdas
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Re: In defense of Hedge Funds

Post by hdas » Wed Sep 19, 2018 4:22 pm

Thesaints wrote:
Wed Sep 19, 2018 4:16 pm
Is the graph to be interpreted by subtracting 0.04% per year from the S&P and 2+20 from the hedge fund ?
Seems like the HF index is net of fees, but the S&P is just the index. H
Stay the course and buy some more.

HEDGEFUNDIE
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Re: In defense of Hedge Funds

Post by HEDGEFUNDIE » Wed Sep 19, 2018 4:29 pm

I have nothing to add, but given my username I felt compelled to post.

staythecourse
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Re: In defense of Hedge Funds

Post by staythecourse » Wed Sep 19, 2018 6:32 pm

How about survivorship bias?

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

columbia
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Re: In defense of Hedge Funds

Post by columbia » Wed Sep 19, 2018 6:35 pm

They certainly have someone’s interest in mind...and it’s not yours.

Hedge Funds Call Time on Investors' Persistent Fee Squeeze
https://www.google.com/amp/s/www.bloomb ... s-are-over

hdas
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Re: In defense of Hedge Funds

Post by hdas » Wed Sep 19, 2018 7:06 pm

staythecourse wrote:
Wed Sep 19, 2018 6:32 pm
How about survivorship bias?

Good luck.
Seems that's accounted for
HFRI Asset Weighted Composite Index:
The HFRI Asset Weighted Composite Index is a global, asset-weighted index comprised of over 1,500 single-manager funds that report to HFR Database. Constituent funds report monthly net of all fees performance in US Dollar and have a minimum of $50 Million under management or a twelve (12) month track record of active performance. The HFRI Asset Weighted Composite Index does not include Funds of Hedge Funds. The constituent funds of the HFRI Asset Weighted Composite Index are weighted according to the AUM reported by each fund for the prior month.
Stay the course and buy some more.

staythecourse
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Re: In defense of Hedge Funds

Post by staythecourse » Thu Sep 20, 2018 8:34 am

hdas wrote:
Wed Sep 19, 2018 7:06 pm
staythecourse wrote:
Wed Sep 19, 2018 6:32 pm
How about survivorship bias?

Good luck.
Seems that's accounted for
HFRI Asset Weighted Composite Index:
The HFRI Asset Weighted Composite Index is a global, asset-weighted index comprised of over 1,500 single-manager funds that report to HFR Database. Constituent funds report monthly net of all fees performance in US Dollar and have a minimum of $50 Million under management or a twelve (12) month track record of active performance. The HFRI Asset Weighted Composite Index does not include Funds of Hedge Funds. The constituent funds of the HFRI Asset Weighted Composite Index are weighted according to the AUM reported by each fund for the prior month.
Not based on what your just posted. That is a terrible methodology. Basically, they let the fund report only if they wanted to. So if fund x closed down in the first 5 years they are not around to report in the first place. Even worse there is a bias as the funds that did well will be the ones more likely to want to report their data. Also, another error in the methodology is since the restrictions are that a fund has to be active for only 12 months there are some funds that the data only shows since they have been active and NOT the entire period of time analyzed which may boost he results further. They should mention the sample size for each data point to rule out the last point.

The PROPER way to do the study should have been is look at the returns of ALL the funds that were active from 1990 to the current. If they no longer exist then they get a doughnut for their returns for all the subsequent years.

Trust me, the folks who did the study KNOW this as well and is why they did the study the way they did it as the results the other way made it a waste to publish to push their agenda.

Off topic, but on topic... This is why Mr. Bogle is brilliant. When he came out with his now named VFINX in lat 1970's he wrote down ALL the equity funds available at the time so we know EXACTLY the results were going forward and are not altered by survivorship bias.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

grok87
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Re: In defense of Hedge Funds

Post by grok87 » Thu Sep 20, 2018 8:48 am

staythecourse wrote:
Thu Sep 20, 2018 8:34 am
hdas wrote:
Wed Sep 19, 2018 7:06 pm
staythecourse wrote:
Wed Sep 19, 2018 6:32 pm
How about survivorship bias?

Good luck.
Seems that's accounted for
HFRI Asset Weighted Composite Index:
The HFRI Asset Weighted Composite Index is a global, asset-weighted index comprised of over 1,500 single-manager funds that report to HFR Database. Constituent funds report monthly net of all fees performance in US Dollar and have a minimum of $50 Million under management or a twelve (12) month track record of active performance. The HFRI Asset Weighted Composite Index does not include Funds of Hedge Funds. The constituent funds of the HFRI Asset Weighted Composite Index are weighted according to the AUM reported by each fund for the prior month.
Not based on what your just posted. That is a terrible methodology. Basically, they let the fund report only if they wanted to. So if fund x closed down in the first 5 years they are not around to report in the first place. Even worse there is a bias as the funds that did well will be the ones more likely to want to report their data. Also, another error in the methodology is since the restrictions are that a fund has to be active for only 12 months there are some funds that the data only shows since they have been active and NOT the entire period of time analyzed which may boost he results further. They should mention the sample size for each data point to rule out the last point.

The PROPER way to do the study should have been is look at the returns of ALL the funds that were active from 1990 to the current. If they no longer exist then they get a doughnut for their returns for all the subsequent years.

Trust me, the folks who did the study KNOW this as well and is why they did the study the way they did it as the results the other way made it a waste to publish to push their agenda.

Off topic, but on topic... This is why Mr. Bogle is brilliant. When he came out with his now named VFINX in lat 1970's he wrote down ALL the equity funds available at the time so we know EXACTLY the results were going forward and are not altered by survivorship bias.

Good luck.
Agree. There is a large amount of survivorship bias in any hedge fund return datA. I’m not sure there is anyway round it.
Keep calm and Boglehead on. KCBO.

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nedsaid
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Re: In defense of Hedge Funds

Post by nedsaid » Thu Sep 20, 2018 9:22 am

staythecourse wrote:
Wed Sep 19, 2018 6:32 pm
How about survivorship bias?

Good luck.
Everything is survivorship bias. It is a really overused term in my opinion. Even the broad indexes exhibit survivorship bias. As far as I know, no one born in 1865 is still living. In the same way, a whole lot of companies that existed then don't exist today. If you look at the older indexes like the Dow, you see that the composition of the index changed a lot over the years. The broader indexes like Total Market will change over time also though not as dramatically.
A fool and his money are good for business.

grok87
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Re: In defense of Hedge Funds

Post by grok87 » Thu Sep 20, 2018 9:31 am

nedsaid wrote:
Thu Sep 20, 2018 9:22 am
staythecourse wrote:
Wed Sep 19, 2018 6:32 pm
How about survivorship bias?

Good luck.
Everything is survivorship bias. It is a really overused term in my opinion. Even the broad indexes exhibit survivorship bias. As far as I know, no one born in 1865 is still living. In the same way, a whole lot of companies that existed then don't exist today. If you look at the older indexes like the Dow, you see that the composition of the index changed a lot over the years. The broader indexes like Total Market will change over time also though not as dramatically.
You raise an interesting point but I don’t agree. The issues staythecourse outlines in detail don’t really apply to an index like The total stock market index.
Keep calm and Boglehead on. KCBO.

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vineviz
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Re: In defense of Hedge Funds

Post by vineviz » Thu Sep 20, 2018 9:38 am

staythecourse wrote:
Thu Sep 20, 2018 8:34 am
hdas wrote:
Wed Sep 19, 2018 7:06 pm
staythecourse wrote:
Wed Sep 19, 2018 6:32 pm
How about survivorship bias?

Good luck.
Seems that's accounted for
HFRI Asset Weighted Composite Index:
The HFRI Asset Weighted Composite Index is a global, asset-weighted index comprised of over 1,500 single-manager funds that report to HFR Database. Constituent funds report monthly net of all fees performance in US Dollar and have a minimum of $50 Million under management or a twelve (12) month track record of active performance. The HFRI Asset Weighted Composite Index does not include Funds of Hedge Funds. The constituent funds of the HFRI Asset Weighted Composite Index are weighted according to the AUM reported by each fund for the prior month.
Not based on what your just posted.
Each fund is weighted by its AUM for the prior month.

If Fund X was 5% of the index in July and its performance in August is -100% whereas every other fund was up 10% then the total return for August = (.05 x -100%) + (.95 * .10%) = 4.5%.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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nedsaid
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Re: In defense of Hedge Funds

Post by nedsaid » Thu Sep 20, 2018 9:44 am

grok87 wrote:
Thu Sep 20, 2018 9:31 am
nedsaid wrote:
Thu Sep 20, 2018 9:22 am
staythecourse wrote:
Wed Sep 19, 2018 6:32 pm
How about survivorship bias?

Good luck.
Everything is survivorship bias. It is a really overused term in my opinion. Even the broad indexes exhibit survivorship bias. As far as I know, no one born in 1865 is still living. In the same way, a whole lot of companies that existed then don't exist today. If you look at the older indexes like the Dow, you see that the composition of the index changed a lot over the years. The broader indexes like Total Market will change over time also though not as dramatically.
You raise an interesting point but I don’t agree. The issues staythecourse outlines in detail don’t really apply to an index like The total stock market index.
Yes, if you took into account all the hedge funds that disappeared then the returns of the hedge fund index would be lower. If the stock market indexes took into account all the businesses that disappeared, their returns would be lower. Any index is going to be sort of a Quality index, you aren't going to want to represent the companies that are about to go bankrupt. To run an index fund effectively, you need to invest in companies that have enough liquidity to be investable. So pretty much any index fund is going to some degree screen for quality and liquidity. The S&P indexes in particular screen for Quality. Even a Total Market Index isn't going to represent the NASDAQ Bulletin Board, The Pink Sheet Stocks, what I call the Wild West of the stock market. Not enough liquidity and most all of this stuff is just junk.
A fool and his money are good for business.

edge
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Re: In defense of Hedge Funds

Post by edge » Thu Sep 20, 2018 10:13 am

Um...stock index funds do take into account the returns of companies in the index that fail...
nedsaid wrote:
Thu Sep 20, 2018 9:44 am
grok87 wrote:
Thu Sep 20, 2018 9:31 am
nedsaid wrote:
Thu Sep 20, 2018 9:22 am
staythecourse wrote:
Wed Sep 19, 2018 6:32 pm
How about survivorship bias?

Good luck.
Everything is survivorship bias. It is a really overused term in my opinion. Even the broad indexes exhibit survivorship bias. As far as I know, no one born in 1865 is still living. In the same way, a whole lot of companies that existed then don't exist today. If you look at the older indexes like the Dow, you see that the composition of the index changed a lot over the years. The broader indexes like Total Market will change over time also though not as dramatically.
You raise an interesting point but I don’t agree. The issues staythecourse outlines in detail don’t really apply to an index like The total stock market index.
Yes, if you took into account all the hedge funds that disappeared then the returns of the hedge fund index would be lower. If the stock market indexes took into account all the businesses that disappeared, their returns would be lower. Any index is going to be sort of a Quality index, you aren't going to want to represent the companies that are about to go bankrupt. To run an index fund effectively, you need to invest in companies that have enough liquidity to be investable. So pretty much any index fund is going to some degree screen for quality and liquidity. The S&P indexes in particular screen for Quality. Even a Total Market Index isn't going to represent the NASDAQ Bulletin Board, The Pink Sheet Stocks, what I call the Wild West of the stock market. Not enough liquidity and most all of this stuff is just junk.

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nedsaid
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Re: In defense of Hedge Funds

Post by nedsaid » Thu Sep 20, 2018 10:25 am

edge wrote:
Thu Sep 20, 2018 10:13 am
Um...stock index funds do take into account the returns of companies in the index that fail...
Explain please.
A fool and his money are good for business.

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vineviz
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Re: In defense of Hedge Funds

Post by vineviz » Thu Sep 20, 2018 10:36 am

nedsaid wrote:
Thu Sep 20, 2018 10:25 am
edge wrote:
Thu Sep 20, 2018 10:13 am
Um...stock index funds do take into account the returns of companies in the index that fail...
Explain please.
Stock indexes will sometimes remove companies that fail to meet some criteria (e.g. share price, profitability, liquidity, etc.) but they include the performance of those companies in the index return right up until the moment the stock is removed from the index.

If the stock goes to zero, or stops trading, before the index provider removes it then the index includes a -100% return for that stock on its final trading day.

If AAPL goes bankrupt right this second, the S&P 500 index will drop by 4.3% or so instantly. The long-term performance of the index will reflect the evaporation of that capital forever, therefore no survivorship bias.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

Theoretical
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Re: In defense of Hedge Funds

Post by Theoretical » Thu Sep 20, 2018 10:42 am

The last 36 years have been a world where two asset classes have served investors well, with zero to sharply negative correlations.

Stock heavy investors haven’t really been served by hedge funds since they’ve performed more like really expensive bonds. Bond heavy investors did pretty well until the apocalypse of 2008.

Since then, the yield starved markets and massaged/artificially low volatility has led to a vast increase in the leverage being used along with an increase in equity like risks.

All that said, if they provide a positive real return when both stocks and bonds are in the trash heap in real terms (like the 70s), then they’ll have done their job, albeit expensively.

I don’t inherently object to either the 2 or the 20, since for example a real estate management company routinely takes a 5-10% haircut off the rent. What rubs me the wrong way is both a high management fee AND a performance haircut. I’m of the view that it should be one or the other.

The fact that long only beta and factor strategies can be and are implemented very cheaply is also why I have little use for DFA funds or the AQR multi factor funds. Good enough goes a long way in investing.
Last edited by Theoretical on Thu Sep 20, 2018 10:47 am, edited 1 time in total.

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nedsaid
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Re: In defense of Hedge Funds

Post by nedsaid » Thu Sep 20, 2018 10:47 am

vineviz wrote:
Thu Sep 20, 2018 10:36 am
nedsaid wrote:
Thu Sep 20, 2018 10:25 am
edge wrote:
Thu Sep 20, 2018 10:13 am
Um...stock index funds do take into account the returns of companies in the index that fail...
Explain please.
Stock indexes will sometimes remove companies that fail to meet some criteria (e.g. share price, profitability, liquidity, etc.) but they include the performance of those companies in the index return right up until the moment the stock is removed from the index.

If the stock goes to zero, or stops trading, before the index provider removes it then the index includes a -100% return for that stock on its final trading day.

If AAPL goes bankrupt right this second, the S&P 500 index will drop by 4.3% or so instantly. The long-term performance of the index will reflect the evaporation of that capital forever, therefore no survivorship bias.
Well, my point is that companies get added and dropped from indexes all the time. If a company is dying a slow death, at some point it will be dropped from an index. A company that has a quick and dramatic death or near death experience will be reflected in the index as such events can happen suddenly. So you have Washington Mutual, Enron, WorldComm, AIG that did damage to the Index averages before they could be dropped. My suspicion is that slow decline is much more common than sudden death for failing companies. Most of the time, the indexes aren't going to wait until the stock goes to zero before dropping such companies from their indexes.
A fool and his money are good for business.

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vineviz
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Re: In defense of Hedge Funds

Post by vineviz » Thu Sep 20, 2018 10:54 am

nedsaid wrote:
Thu Sep 20, 2018 10:47 am
Well, my point is that companies get added and dropped from indexes all the time. If a company is dying a slow death, at some point it will be dropped from an index.
It depends on the index, I guess. S&P is going to drop a stock faster than CRSP, for instance.

Either way, the performance of the stock is fully reflected in the index as long as the stock is IN the index which means there is no survivorship bias in the index.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

hdas
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Re: In defense of Hedge Funds

Post by hdas » Fri Oct 26, 2018 9:03 am

Some nice perspective here: https://www.bloomberg.com/opinion/artic ... es-of-2008

On Managers delivering alpha:
MG: Is it getting harder to generate alpha?

RF: Absolutely. It's certainly gotten a lot harder as more people know what opportunities exist. As the economy grows,
maybe the opportunities grow, but the number of people out there looking for those opportunities is growing faster. So
it is certainly harder to generate alpha.

MG: So are we getting closer to an efficient market that will make alpha impossible to generate?

RF: The market isn't some static thing that just sits there; the very act of exploiting something changes the market. I
don't know that we’ll ever find a situation in which we'll have something akin to pure efficiency. I'm not sure even what
that means. You assume everybody has zero trading costs, infinite liquidity and perfect information. It's kind of silly. I
don't think markets can become efficient in the classical sense. It's going to be harder to distinguish oneself in the
markets -- but that's not a bad thing.

MG: What percentage of the asset managers you screen are genuinely able to generate alpha?

RF:It's rare. I would say 10 to 15 percent would be pushing it, and in that 10 to 15 percent, a fair number are able to
produce some alpha, but not enough that you'd be really excited about investing with them.
In any strategy, because it's driven by certain external economic factors, it's not unreasonable for it to go through
periods when it doesn't look so wonderful.
But what happens is managers sometimes panic and they violate their own internal risk regiments, and that's really
serious. People who have a successful operation and regimen that they are following sometimes they go off the
reservation because they are trying to make up for their losses. That's something we look for very carefully. To detect
that, you look at volatility and how that's trending. When we see someone's volatility creeping up over levels that we
had before, we become very concerned. Sometimes we've gotten out of funds simply because of second-order effects,
because of what we see on the volatility side, even though the returns haven't yet shown a problem. Very often we've
been right.

MG: How long do you give an underperforming fund manager?

RF: A lot depends on individual circumstances. It's like asking a doctor how long do you keep a patient in the hospital;
some people are treated on an outpatient basis, some people are going to be in there for six months. It's the same thing
with a fund. It just depends on the diagnosis.
As long as the fund manager isn't doing something against his or her own risk protocols, which we've investigated and
accepted, we're willing to hang in for a fairly long amount of time as long as we understand what's going on. It's when
somebody's losing money and we don't know why they're losing money -- why all of a sudden their alpha has collapsed
and their volatility has gone up -- that's when we move really fast to get out.
On "Artificial Intelligence" (Check out latest AQR hire M.L.Prado)
Anytime you have a new technology you have an initial period of people realizing there's some meat on
that bone, you can maybe make yourself a little more competitive, but then it tends to get oversold. Everybody figures
this is going to be the magic potion that's going to cure everything. People get into it not really understanding it, then it
loses some of its luster and it collapses. Then it gradually comes back and the industry matures to use these techniques.
We're not quite in the oversold category yet, but it is coming.
Investment managers are going to have to start using these techniques if they want to stay competitive. An investment
manager's main job is to make decisions on behalf of clients in those clients' interests. At a minimum, managers have to
decide what these techniques can and can't do.
There is significant promise in these new techniques, but it's important to understand these things have been around
for a long time. When we talk about things like artificial intelligence, the emphasis is on the artificial, not on the
intelligence. These things in no way represent a reasoning process; they're basically model-fitting techniques. They can
be very powerful, but they can be misused. You have to take the time to understand the underlying technology.
Stay the course and buy some more.

lostdog
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Re: In defense of Hedge Funds

Post by lostdog » Wed Dec 12, 2018 7:16 pm

What is a rogue wave he mentions in this video? This is a hedge fund manager apologizing for the failure of his hedge fund.

https://youtu.be/VNYNMM0hXXY

averagedude
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Re: In defense of Hedge Funds

Post by averagedude » Wed Dec 12, 2018 8:01 pm

Remember that when someone is trying to promote an investing strategy, they always pick the best start and end dates. As far as hedge funds are concerned, Warren Buffett made a bet that the Standard and Poor 500 index would beat a basket of hedge funds over a long period of time and he won the bet decisively.

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