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.
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

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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 ?

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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
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

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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

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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.
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

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

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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.
RIP Mr. Bogle.

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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.

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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.
RIP Mr. Bogle.

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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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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.
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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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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.
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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

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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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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.
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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

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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.
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

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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
VTWAX and chill.

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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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Re: In defense of Hedge Funds

Post by hdas » Mon Feb 11, 2019 11:06 am

A couple of articles with sound reasoning regarding alternatives.

Can We Predict Forward Alternative Investment Performance?
Low Interest Rates = A Headwind for Absolute Hedge Fund Performance

In terms of predicting alternative fund vs. stock / bond performance, the opportunity cost of allocating to a hedge fund is largest when these premia are high and lowest when they are low (or negative)
Image

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

How Should Alternative Investments Be Benchmarked?
So how do you account for the use of leverage in a fund? Or the risk and cost of short-selling? Or the illiquid nature of the fund structures? The lock-ups? The key-person risk? The lack of transparency in the holdings? The fact that many of the holdings are being valued by the funds themselves?
Maybe investors in alternatives should benchmark these funds against their own expectations. Why do we hold these funds and are they meeting our expectations? They can compare them to the rest of their portfolio to realize the opportunity cost of holding them. Every investment decision comes down to a simple cost/benefit analysis that too few investors actually go through before making an investment.

Many investors in this space invest first and ask questions later. Or worse yet, they move the goalposts and make up excuses after the fact. The truth is that these fund structures have a unique set of risks and attributes that can be difficult to neatly define in an index or benchmark. It’s up to the investor to figure out if those risks make sense or not in terms of how they fit into their overall portfolio.
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

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Re: In defense of Hedge Funds

Post by nedsaid » Mon Feb 11, 2019 11:32 am

Doubtless, there are folks out there who have succeeded running hedge funds but there are some issues here.

First, not so easy for individuals to invest as these funds have very high investment minimums.

Second, there are the Liquid Alts that use shorts and leverage that are available through advisors like Buckingham but you eliminate the illiquidity premium and run the risk of everyone hitting the exits at once. Hedge funds are semi-liquid at best and this helps protect both the manager and investors.

Third, expenses are a pretty high hurdle. The 2% management fee and 20% of profits model is a very expensive one. Seems like one would have to find some market anomalies to make this work, markets are pretty efficient though not perfectly so.

Fourth, hard to say if these are any better at hedging the stock market than boring old bonds, particularly long-term US Treasuries. It seems like long Treasuries are the perfect stock market hedge save for a 1970's stagflation scenario, when both stocks and bonds were hit hard.

Fifth, since these funds have very tough competition and use complex trading strategies, they don't want to give away their "secret sauce". So these type of funds have to be sort of a black box to keep proprietary strategies secret and to prevent front-running by competitors.

Sixth, as noted above, the benchmark index for these funds is pretty flawed as only the funds with the best results would want to report results. My suspicion is that the average performance for such funds is more like 2% to 3%, rather than the 7% or so reported by a flawed index. Pretty boring and bond-like, the returns would be similar to the liquid alts.
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Re: In defense of Hedge Funds

Post by nedsaid » Mon Feb 11, 2019 11:41 am

I have a lot of respect for people running hedge funds and those like Cliff Asness who run the Liquid Alt funds. What they are doing is quite hard to do, it is a huge intellectual challenge even with the aid of superfast computers. Cliff admits that there are others better than him at this game but he and AQR aim to be "good enough" to provide factor premiums and a good non-correlating asset for their clients. And Cliff does this at lower costs than the hedgies. They do their part to make markets efficient for the rest of us.
A fool and his money are good for business.

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Re: In defense of Hedge Funds

Post by garlandwhizzer » Mon Feb 11, 2019 1:34 pm

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.
A few key points on this index aside from survivorship bias. First it reports the the results of the 1500 single-manager funds THAT REPORT TO HFR DATABASE. As I understand it, there is no requirement that all hedge funds must report their results to HFRI, only the ones that choose to report them. It is very likely in such a scenario that the funds with lousy performance choose not to report their results. So it is a heavily biased sample of hedge funds that provide the data in the first place irrespective of survivorship bias. Biased junk in, biased junk out. Buffett knew what he was doing when he bet against them. It appears that some hedge fund investors are starting to flee 2 and 20.

https://www.hedgefundresearch.com/news/ ... r-outflows

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Re: In defense of Hedge Funds

Post by nisiprius » Mon Feb 11, 2019 2:02 pm

Sorry, for the reasons noted by GarlandWhizzer I don't understand how we can know whether or not the data set is accurate. Is the compilation of data and the reporting overseen by the SEC or some other independent, obviously trustworthy authority? To the extent that hedge funds invest in illiquid assets--which they are allowed to do, that is one of many big difference between hedge funds and mutual funds--how are those assets valued and how do we know the reported values are realistic?
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Re: In defense of Hedge Funds

Post by garlandwhizzer » Mon Feb 11, 2019 9:16 pm

HFRI stands for Hedge Fund Research, Incorporated of Chicago. It does not appear to be a governmental entity, rather a corporation which like most corporations derives income somehow. I can't find out how but I strongly suspect that the select group of well-performing hedge funds that report their results to HFRI pays HFRI a fee and somehow uses this exposure for marketing their products. Just a suspicion, not a fact. What I do know for sure is that index results are worthless if the losers are excluded.

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hdas
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A table with the select survivors

Post by hdas » Sat Jul 20, 2019 9:53 am

Just for reference:

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Re: In defense of Hedge Funds

Post by nedsaid » Sat Jul 20, 2019 12:55 pm

My philosophy is never say never, though there are some things that are almost never. Hedge funds would be in the almost never category. It sounds like maybe there are 20 hedge funds that have been really successful over longer periods of time and none of the folks running those would return my phone calls. It just seems that the odds for success here are pretty daunting, particularly at the retail level. You need the very best minds in the world and the very best technology in the world to succeed at the hedge fund game.

As far as the Liquid Alts, like AQR Style Premia, it would be a maybe in my opinion. As bright as Cliff Asness and his team is at AQR, Asness admits that folks like Renaissance Technologies is better at this than he and AQR. In Asness view, AQR has to be good enough. I would say the jury is still out of the liquid alts for retail investors.

The problem that I see with "market neutral" is that this approach seems to be "return neutral", most of the stuff I have looked at on the retail level is not impressive. I look at what is available at Fidelity and I see a few things in the Alternative Investment universe that has impressive performance, you wonder if it is luck and you wonder if that performance can continue. I just don't have the experience and expertise to properly evaluate these types of investments.
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Re: In defense of Hedge Funds

Post by nisiprius » Sat Jul 20, 2019 1:06 pm

1) When someone displays financial data on a linear vertical scale, alarm bells start ringing in my head.

2) The smooth return of hedge funds, particularly during downturns, may be deceptive because many hedge funds have large investments in illiquid assets that do not have any actual market value available. Assets are reported by valuations estimated by the fund itself, and during a downturn may be valued optimistically.

(Mutual funds can't get away with this, because investors have the right to daily redemption of their shares--as much as they like, whenever they like. The valuations used by the fund have to be realistic because on any given day investors might demand that they make good on it.)

Do Hedge Fund Managers Misreport Returns? Evidence from the Pooled Distribution
We find a ... discontinuity ... present in live funds, defunct funds, and funds of all ages, ... absent in the three months culminating in an audit, funds that invest in liquid assets, and hedge fund risk factors, suggesting that it is generated neither by the skill of managers to avoid losses nor by nonlinearities in hedge fund asset returns. A remaining explanation is that hedge fund managers avoid reporting losses to attract and retain investors....

Though the number of fraud cases is modest, violations of the law may be widespread but undetected. In particular, the discretion with which managers voluntarily submit returns to databases may permit purposeful misreporting to attract and retain investors.
3) Before 1976, when it was noticed that mutual funds and institutional money managers were consistently underperforming the S&P 500 index, a common riposte was "you cannot invest in an index." In the 1973 edition of A Random Walk Down Wall Street, Burton Malkiel opined "It's time the public could." Since the launch of the Vanguard 500 index fund, everyone has been able to match the S&P 500 to within a few basis points.

A paper HFRI index is meaningless unless there is a way to invest in it. If someone is going to show us the HRFI as evidence of real-world performance, I think they should bear the burden of showing just how any ordinary investor--capable of investing in the Vanguard 500 Index--can get these HRFI results. This, the Mathematical Investor article does not do.

Hedge Fund Research claims that "The HFRI Indices are investable via synthetic replication products" but provides no names or ticker symbols. The first one that pops up in a Google Search of "HFRI ETF" is the Proshares Hedge Replication Fund, HDG. But according to Proshares, it does not even claim to track HFRI, but rather the "Merrill Lynch Factor Model® - Exchange Series (MLFM-ES)."

HDG only goes back to 2011, so if someone has a good, transparent, public, real-world example of a fund or ETF that tracks HFRI and goes back a lot farther in time, please mention it.

According to their own factsheet, we see a double whammy: as of 3/31/2019,
  • HDG has underperformed MFLM-ES, the index it seeks to track.
  • But MFLM-ES itself has underperformed HFRI, the index that is shown to us in defending the performance of hedge funds.
These are not the tiny tracking errors seen in ordinary index funds. I'll use the << symbol, "much much smaller than."

HDG << MFLM-ES << HFRI.


In fact, 7/21/2011 through 3/31/2019:
--HDG averaged 1.70%/year
--MFLM-ES, which it's supposed to track, averaged 2.68%/year
--HFRI, the index that MFLM-ES is supposed to "replicate," averaged 3.27%.
--And, lest we forget, the Vanguard 500 Index Fund, over that time period averaged 12.55% annualized. Maybe the bull market is to "blame" for that, but it is not to blame for HDG << MFLM-ES << HFRI.


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Last edited by nisiprius on Sat Jul 20, 2019 2:03 pm, edited 4 times in total.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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