Should we all invest in hedge funds?

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NightFall
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Should we all invest in hedge funds?

Post by NightFall » Thu Feb 05, 2015 7:31 am

http://www.financialsamurai.com/how-inv ... portfolio/

I was just reading this article. The author claims that hedge funds minimize risk in a downturn and outperform the s&p500 over the long term. I'm a bit skeptical you could do so well after fees. At the same time the author says hedge funds will not perform as well in a bull market (buffett vs hedge fund bet). What do you think? Should we all be investing in hedge funds?

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nisiprius
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Re: Should we all invest in hedge funds?

Post by nisiprius » Thu Feb 05, 2015 7:40 am

The reason I want to invest in hedge funds is:
  • I want hot chicks.
  • I want a guarantee I will live to age 110 in health and happiness.
  • I want world peace.
It's true that hedge funds can't give me any of these things, but that's a detail.
Last edited by nisiprius on Thu Feb 05, 2015 7:41 am, edited 1 time in total.
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Re: Should we all invest in hedge funds?

Post by rkhusky » Thu Feb 05, 2015 7:41 am

NightFall wrote: Should we all be investing in hedge funds?
No.

Tanelorn
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Re: Should we all invest in hedge funds?

Post by Tanelorn » Thu Feb 05, 2015 7:46 am

The hedge funds certainly look better if you start the charts in 1990 rather than recently - markets have been tougher for them recently. I think there's no question the diversification is better, but everything has a price and the fees may make it not worthwhile.

Working at Goldman gets you access to a lot of things the average person will never see. I do know Goldman offered a number of top hedge funds in their 401k plan as he described, so maybe it made sense to invest in if they had been carefully selected and vetted. The average person won't be able to do that either.

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Re: Should we all invest in hedge funds?

Post by nisiprius » Thu Feb 05, 2015 7:51 am

The Morningstar Hedge Fund Index goes back to 2002 but I can't find any chart or data going back more than five years... anyone know where to find it? Its performance during 2008-2009 would be a good indicator of the ability of "hedge funds" to protect against downturns.
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Re: Should we all invest in hedge funds?

Post by zaboomafoozarg » Thu Feb 05, 2015 9:06 am

One reason I do not want to invest in a hedge fund:

http://www.bogleheads.org/forum/viewtop ... 0&t=156250

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Re: Should we all invest in hedge funds?

Post by nisiprius » Thu Feb 05, 2015 9:24 am

As evidence that "hedge funds" do? can? did? one of them once did? protect against downturns, Financial Samurai wrote:
Financial Samurai wrote:When the housing market crashed in 2008-2010, John Paulson made his hedge fund $3-4 billion as he was short credit default obligations (CDOs). John became a billionaire overnight, and is known for making one of the best trades in one of the most difficult environments ever.
So, Financial Samurai seems to be specifically endorsing Paulson as a hedge fund manager.

So, since 2008-2009, what experience have we had with "downturns?" Remember that nasty 19% correction in 2011 when there was a thread on "U.S. stocks in freefall," and at least one behavioral economist admitted to panic-selling? I personally was jittery about it, but I just sat there in Total Stock Market Index and Total International and... just took it. Financial Samurai writes:
I never want to lose sleep again when the markets are taking a dive. I want my fund manager to lose sleep because he is up every night thinking about the best ways to manage risk.
2011 was definitely the time to be invested in a great hedge fund with a great manager, always thinking, thinking, thinking about the best ways to manage risk so that you can sleep at night.

The blue line is Paulson's fund. The red line is MSCI ACWI World, very similar to Vanguard Total World Stock Index Fund, which in turn was reasonably similar to Vanguard [U.S.] Total Stock Market Index Fund. The red line is a reasonable picture of what had to be endured by people too poor to invest in Paulson's fund, people who just had to sit there and take it.

Source
Image

Meanwhile, John Paulson is waiting for his MA bets to turn around.
36% drop in his Advantage Plus fund last year as assets at Paulson & Co. fell below $20 billion. But investors continue to look at the hedge fund manager as a way to bet on rising merger and acquisition activity globally.
The operative word here is "bet."

Image
Last edited by nisiprius on Thu Feb 05, 2015 9:39 am, edited 3 times in total.
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Re: Should we all invest in hedge funds?

Post by Jack FFR1846 » Thu Feb 05, 2015 9:35 am

There was a recent marketwatch article stating that of all hedge funds 15 years ago, 95% underperformed so badly that they were disolved with assets going into "winner" funds.

Sort of like an 8 horse one mile race where you get to change your bet every eighth mile and the last horse is dropped every eighth mile. By the end of the race, you've chosen the winner because all the losers have been pulled.
Last edited by Jack FFR1846 on Thu Feb 05, 2015 9:38 am, edited 1 time in total.
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Re: Should we all invest in hedge funds?

Post by Toons » Thu Feb 05, 2015 9:36 am

All of us except Warren Buffett :happy

http://www.cnbc.com/id/102395788#.
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Re: Should we all invest in hedge funds?

Post by Gropes & Ray » Thu Feb 05, 2015 9:40 am

Financial Samurai wrote:When the housing market crashed in 2008-2010, John Paulson made his hedge fund $3-4 billion as he was short credit default obligations (CDOs). John became a billionaire overnight, and is known for making one of the best trades in one of the most difficult environments ever.
Great trade! Too bad another manager was on the losing side of that. I wonder if I would have picked the right manager ahead of time? Paulson probably didn't have a crystal ball, and if he did, I didn't have a crystal ball to tell me that he had a crystal ball.

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NightFall
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Re: Should we all invest in hedge funds?

Post by NightFall » Thu Feb 05, 2015 9:42 am

Jack FFR1846 wrote:There was a recent marketwatch article stating that of all hedge funds 15 years ago, 95% underperformed so badly that they were disolved with assets going into "winner" funds.
So do you think this is why the performance chart looks so good? Is it just excluding the losers?

Image

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Re: Should we all invest in hedge funds?

Post by BogleMe » Thu Feb 05, 2015 10:20 am

Well of course, by definition those hedge fund indexes can only include hedge funds that are still around. If XYZ Hedge Fund fails in 2014 and isn't open in 2015, this fund is absent in any sort of hedge fund index for 2015. So what you have is an index that continues to track the survivors.

I wonder if those returns are after both management fees (~2%) and the notorious 'percent of return' fee which is usually ~20%. I also imagine hedge funds are multiples-times worse on taxes than your standard high turnover actively managed mutual fund.
Last edited by BogleMe on Thu Feb 05, 2015 11:27 am, edited 1 time in total.

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Re: Should we all invest in hedge funds?

Post by Tanelorn » Thu Feb 05, 2015 10:56 am

Returns are quoted after fees, as is the standard practice for everything (like ETFs and mutual funds). You can read about HRFI's index here:

https://www.hedgefundresearch.com/index ... ndices-met

They include all the funds they had reporting and meeting their criteria on a monthly basis, so it's not just like they picked all the ones from 2015 that existed in 1990 and plotted that (which would have huge survivorship bias). There may still be subtle bias issues, but they're not as big or obvious.

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Re: Should we all invest in hedge funds?

Post by anil686 » Thu Feb 05, 2015 11:39 am

If you watch the linked CNBC clip where Buffet's bet with the hedge funds was discussed yesterday - these 2 money managers discuss hedge funds versus passive funds (i.e. the SP 500). Notice what the second person says wrt passive funds versus hedge funds - paraphrasing:

If an investor would hold the investment for 10 years, it would be very difficult for the hedge fund or any fund to beat the index fund. The problem is most investors can't or won't wait 10 years and so other strategies may be needed...

In other words, if you follow JB's advice to buy and hold forever - it would probably be wise to avoid investing in hedge funds and just invest in the index IMO...

http://video.cnbc.com/gallery/?video=3000352039

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Re: Should we all invest in hedge funds?

Post by Valuethinker » Fri Feb 06, 2015 3:57 am

https://www.youtube.com/watch?v=SfZWFDs0LxA (warning: trailer for racy movie)

The "hero" of 50 Shades is a hedge fund manager. Perhaps we buy hedge funds for the erotic excitement? ;-).

More seriously, because human beings like to gamble? And gambling sounds *so* much better if we call it by a fancy name like 'absolute return long short' or 'risk arbitrage'.

Your odds of being able to access a good manager's funds, early enough in the lifecycle of that fund to benefit from the outperformance, are low.

This is not the 'new new thing' any more. We will have to find another wheeze that isn't broadly accepted, yet.

It's a fair bet by the time we have heard of it, it is done and dusted.

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Re: Should we all invest in hedge funds?

Post by Index Fan » Fri Feb 06, 2015 5:08 am

Larry Swedroe doesn't think so-

Swedroe: Hedge Funds Are Status Symbols (ETF.com)

http://www.etf.com/sections/index-inves ... nopaging=1
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Re: Should we all invest in hedge funds?

Post by noyopacific » Fri Feb 06, 2015 6:19 am

nisiprius wrote:The reason I want to invest in hedge funds is:
  • I want hot chicks.
  • I want a guarantee I will live to age 110 in health and happiness.
  • I want world peace.
It's true that hedge funds can't give me any of these things, but that's a detail.
I'm with Nisiprius on this.
Mutual funds, especially Index funds are too passive and just plain boring.
And like Larry Swedroe says: "Hedge Funds Are The Ultimate Status Symbol !"
I don't care if Fama says: “If you want to invest in hedge funds where they steal your money and don’t tell you what they’re doing, be my guest.”
And DFA's co-founder Rex Sinquefield calling hedge funds “mutual funds for rich idiots.” Was only being rude.
Brooks was right: “Exclusivity and secrecy have been crucial to hedge funds from the first. It certifies one’s affluence while attesting to one’s astuteness.”
:wink:
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Re: Should we all invest in hedge funds?

Post by pkcrafter » Fri Feb 06, 2015 10:42 am

So, Financial Samurai seems to be specifically endorsing Paulson as a hedge fund manager.
John Paulson, no. Pat Paulson, yes! :D

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Re: Should we all invest in hedge funds?

Post by Johno » Fri Feb 06, 2015 11:59 am

NightFall wrote:
Jack FFR1846 wrote:There was a recent marketwatch article stating that of all hedge funds 15 years ago, 95% underperformed so badly that they were disolved with assets going into "winner" funds.
So do you think this is why the performance chart looks so good? Is it just excluding the losers?
No I doubt there's any obvious large flaw or hoodwinking going on in that graph. However HF returns are harder to measure than those of the S&P and other sources have different answers. For example this article from last year quoted the Credit Suisse HF Index total return as tied with the S&P 500's since 1994, although HF index had only around half the std deviation of annual return ('risk') of the S&P in that period. But the article like a lot of recent ones is basically about how HF's did less well recently (one can see in the graph in that article CSHFI was way ahead of the SP at trough of the 09 crisis, but has lagged since, and also lagged in the 1990's, having caught up when the stock market stumbled in the early 2000's).
http://www.businessinsider.com/hedge-fu ... cal-2013-8

So we don't actually need pop psychology put downs of HF investors as seeking 'status' to see why rational investors might want to look into an 'asset' that had even approximated the S&P's return with a much smoother path for a pretty long time. But firstly HF's aren't really an 'asset class', various ones have an almost unlimited variety of strategies. And expenses are high, tax efficiency not good, so this all compounds the basic problem with any previously attractive investment: will the future replicate the past? And the fact that so many more HF's exist now also ups the ante on that. If everyone answered 'yes we should all invest in HF's, with all our money!' and they could, then obviously HF's as a whole couldn't outperform, even before costs, even with alternative (not attempts to beat the S&P) strategies. And that might have happened to some degree.

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Re: Should we all invest in hedge funds?

Post by nisiprius » Fri Feb 06, 2015 12:40 pm

NightFall wrote:So do you think this is why the performance chart looks so good? Is it just excluding the losers?

Image
I don't know. It does look good. I simply want to acknowledge that it does look good. For now I am just going to deal with it by pretending I don't see it. Hopefully I'll forget about it long before I get around to digging into it. :D

OK, how about some free-floating data-free snark: is there a quick way to tell, yes or no, do these statistics include Canarsie Capital, the fund that lost 99.8% of its value in 9 months?
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Re: Should we all invest in hedge funds?

Post by Beliavsky » Fri Feb 06, 2015 1:18 pm

NightFall wrote:http://www.financialsamurai.com/how-inv ... portfolio/

I was just reading this article. The author claims that hedge funds minimize risk in a downturn and outperform the s&p500 over the long term. I'm a bit skeptical you could do so well after fees. At the same time the author says hedge funds will not perform as well in a bull market (buffett vs hedge fund bet). What do you think? Should we all be investing in hedge funds?
To the extent that you are going to invest with active managers, do you really think that

(1) demanding daily liquidity (as with open-end mutual funds) and
(2) paying mostly or entirely based on assets under management rather than performance

is the ideal way to do so?

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