[HN Gopher] Warren Buffett's bet against hedge funds at the Long...
       ___________________________________________________________________
        
       Warren Buffett's bet against hedge funds at the Long Now Foundation
       (2008-17)
        
       Author : mooreds
       Score  : 55 points
       Date   : 2021-02-28 16:20 UTC (6 hours ago)
        
 (HTM) web link (longbets.org)
 (TXT) w3m dump (longbets.org)
        
       | the_drunkard wrote:
       | This bet is disengeneous as *most hedge funds operate under risk
       | neutral long /short strategies that seek to generate returns
       | irrespective of market conditions.
       | 
       | Want to know what a good year for a PM at a major platform hedge
       | fund (P72, BAM, Millenium, etc... ) looks like? Probably in the
       | range of 8 -12% returns, which translates to 7-figure pay days.
       | 
       | A more in depth explanation below from the article is linked
       | below.
       | 
       | > Having the flexibility to invest both long and short, hedge
       | funds do not set out to beat the market. Rather, they seek to
       | generate positive returns over time regardless of the market
       | environment. They think very differently than do traditional
       | "relative-return" investors, whose primary goal is to beat the
       | market, even when that only means losing less than the market
       | when it falls. For hedge funds, success can mean outperforming
       | the market in lean times, while underperforming in the best of
       | times. Through a cycle, nevertheless, top hedge fund managers
       | have surpassed market returns net of all fees, while assuming
       | less risk as well. We believe such results will continue.
        
         | tinus_hn wrote:
         | That hedge fund manager that took the bet surely mustn't know
         | what he is talking about!
        
           | the_drunkard wrote:
           | Please read the article. It's explained clearly under Protege
           | Partners, LLC's Argument.
           | 
           | > Mr. Buffett is correct in his assertion that, on average,
           | active management in a narrowly defined universe like the
           | S&P; 500 is destined to underperform market indexes. That is
           | a well-established fact in the context of traditional long-
           | only investment management. But applying the same argument to
           | hedge funds is a bit of an apples-to-oranges comparison.
           | 
           | > Having the flexibility to invest both long and short, hedge
           | funds do not set out to beat the market. Rather, they seek to
           | generate positive returns over time regardless of the market
           | environment. They think very differently than do traditional
           | "relative-return" investors, whose primary goal is to beat
           | the market, even when that only means losing less than the
           | market when it falls. For hedge funds, success can mean
           | outperforming the market in lean times, while underperforming
           | in the best of times. Through a cycle, nevertheless, top
           | hedge fund managers have surpassed market returns net of all
           | fees, while assuming less risk as well. We believe such
           | results will continue.
        
         | kortilla wrote:
         | So is your argument that we just haven't been through a cycle
         | or else the hedge funds would have come out ahead? If they
         | didn't come out ahead after all of the turmoil, they are (on
         | average) worse than an index fund.
        
           | the_drunkard wrote:
           | > So is your argument that we just haven't been through a
           | cycle or else the hedge funds would have come out ahead? If
           | they didn't come out ahead after all of the turmoil, they are
           | (on average) worse than an index fund.
           | 
           | No. The proposition of most platform hedge funds is not to
           | beat the market. It's to generate returns in any type of
           | environment on a risk neutral basis.
           | 
           | So if you invest in a hedge fund, do not expect market
           | returns. Expect range-bound returns in any type of market
           | environment.
           | 
           | Hedge funds are risk management vehicles for institutional
           | money.
        
         | jameshart wrote:
         | Every year there are hedge fund managers that outperform the
         | market. The trick is knowing at the beginning of the year which
         | manager that's going to be.
         | 
         | Absent that crystal ball, a portfolio of hedge funds is a
         | strictly more expensive way of investing than an index fund.
        
           | internetslave wrote:
           | This is false. If you work in the industry there are
           | consistent winners.
        
             | JKCalhoun wrote:
             | And, as I understand from Bogle's (admittedly dated) book,
             | when that happens everyone rushes into the fund and it
             | begins to underperform due to its increased
             | weight/influence (see Peter Lynch's Magellan Fund).
        
       | CapriciousCptl wrote:
       | The lesson Warren's making isn't that you can't beat the market.
       | Of course, Warren himself is an example you can. It's also not a
       | statement about any individual hedge fund, which may have
       | "different goals only for sophisticated investors."* Instead,
       | it's that on balance, _by far most managers_ don 't beat the S&P
       | 500 on an after-fee basis.
       | 
       | And if you include taxes in those fees and the benefit of
       | deferred tax liabilities it's even harder to beat an index fund.
       | 
       | * It's reasonable to be skeptical about any fund having a goal
       | that's anything other then maximizing long-term returns.
        
         | JKCalhoun wrote:
         | Sounds like Warren Buffett is a boglehead? Or a cheerleader at
         | least.
         | 
         | I confess to having drunk the Kool-aid and can report that I no
         | longer have investment anxiety.
        
           | burlesona wrote:
           | I think it's more like Buffet would say you should either
           | choose the optimal passive investment strategy (index funds),
           | or be a fully active investor yourself (picking your own
           | investment strategy), rather than paying significant fees for
           | someone else (hedge funds) to actively invest for you.
        
         | bidirectional wrote:
         | No, his bet is that these products which provide exposure to
         | hedge funds for retail investors are not worth it. If he wanted
         | to bet against hedge funds in general, then the bet would have
         | been constructed like that (i.e. average performance of funds
         | which aim to beat the market).
         | 
         | > * It's reasonable to be skeptical about any fund having a
         | goal that's anything other then maximizing long-term returns.
         | 
         | I really don't think it is. If I'm a sophisticated investor, I
         | may want to invest in funds which hedge against tail-risk, or
         | provide broad exposure to some specific sector, etc. Neither of
         | these things are about maximising returns relative to the
         | S&P500. There are strategies with negative expected returns in
         | the long-run, but when added to a portfolio can improve its
         | returns. Portfolio construction can get very complex.
        
           | CapriciousCptl wrote:
           | Well, no. From Warren himself: "I made the bet... (2) to
           | publicize my conviction that my pick - a virtually cost-free
           | investment in an unmanaged S&P 500 index fund - would, over
           | time, deliver better results than those achieved by most
           | investment professionals, however well-regarded and
           | incentivized those "helpers" may be." [1]
           | https://www.berkshirehathaway.com/letters/2017ltr.pdf.
           | 
           | And, regarding being skeptical of things like "hedging risks"
           | and "complex portfolios," I don't know. I'm just not sure
           | enough hedge funds really do a great job handling tail risks
           | to not be skeptical of all of them as a group. And, surely
           | sophisticated investors can target specific sectors and build
           | arbitrarily complex portfolios (if they're into that sort of
           | thing) with passive things like ETFs for much lower fees on
           | their own.
        
             | bidirectional wrote:
             | That's clearly not a bet against hedge funds, but
             | 'investment professionals', which in this case are these
             | people offering pooled funds to the retail market. I agree
             | with it and I'm sure many people in the hedge fund industry
             | would agree with it.
             | 
             | I'm not talking about all hedge funds managing tail risk
             | for their own portfolios, but funds which are designed to
             | do nothing but hedge against tail risk. They provide a
             | valuable service, and a small allocation to such a fund in
             | concert with a large holding in the S&P500 will often
             | outperform the S&P500, even if the fund itself loses money.
        
               | asdfasgasdgasdg wrote:
               | > That's clearly not a bet against hedge funds,
               | 
               | This isn't clear to me. To me it seems rather that this
               | is a bet against hedge funds. I can see a way to your
               | interpretation but it does not seem as likely to me.
        
           | ckastner wrote:
           | > _If he wanted to bet against hedge funds in general, then
           | the bet would have been constructed like that (i.e. average
           | performance of funds which aim to beat the market)._
           | 
           | Quoting the shareholder's letter from 2016 [1], the actual
           | bet was "that no investment pro could select a set of at
           | least five hedge funds - wildly-popular and high-fee
           | investing vehicles - that would over an extended period match
           | the performance of an unmanaged S&P-500 index fund charging
           | only token fees. [...] For Protege Partners' side of our ten-
           | year bet, Ted picked five funds-of-funds whose results were
           | to be averaged and compared against my Vanguard S&P index
           | fund."
           | 
           | [1] https://www.berkshirehathaway.com/letters/2016ltr.pdf
        
       | cuspycode wrote:
       | Am I missing something here? To me, Buffett's argument sounds
       | like a reformulation of Sharpe's Theorem[0] from 1991, which
       | states that active investors cannot in aggregate outperform
       | passive investors. This is an easily proved theorem, so what's
       | the catch here? Why would anyone bet against a theorem?
       | 
       | [0] https://web.stanford.edu/~wfsharpe/art/active/active.htm
        
         | scotty79 wrote:
         | Because they think they can predict the future and their
         | business model relies on their customers believing that.
        
         | missedthecue wrote:
         | Isn't Warren himself proof that you can? He beat the index over
         | a very protract period of time.
        
           | jessermeyer wrote:
           | Under what time-horizon is the theorem valid for?
        
             | cuspycode wrote:
             | It's valid for any time period. The crucial point is that
             | the theorem talks about the aggregate returns. It's like if
             | you have 10 cars in a race, and 3 of them run at exactly
             | the same speed which is the average of all ten (i.e. they
             | follow the index), then the average speed of the remaining
             | 7 (the actively managed) must also match that speed, even
             | if their individual speeds can vary a lot.
        
           | fractionalhare wrote:
           | No, because Buffett is an individual. The theorem is a
           | statement of aggregate performance.
           | 
           | It's not surprising there exist individual people who are
           | capable of beating the market, just like it's not surprising
           | there exist people who can play sports at an elite level. You
           | likewise wouldn't expect every human to be able to play at
           | the elite level.
           | 
           | Aggregate performance should cluster around a point of
           | central tendency.
        
             | d23 wrote:
             | And as Buffet himself has said: as Berkshire grows in size
             | they will have a harder time beating the market simply
             | because they are becoming a bigger part of it.
        
             | missedthecue wrote:
             | I see
        
         | riffraff wrote:
         | what is being tested is not that the _average_ active investor
         | won't beat the market, but that it's impossible (or very hard)
         | to pick a set of active investors that would beat the market.
        
       | nabla9 wrote:
       | The fact that hedge fund managers live from the fees tells what
       | they really think about their skills. Never gamble using your own
       | money.
       | 
       | Any truly successful fund closes itself from investors. If you
       | really generate profits, there is no reason to give it away after
       | AUM reaches certain level.
        
         | the_drunkard wrote:
         | > The fact that hedge fund managers live from the fees tells
         | what they really think about their skills. Never gamble using
         | your own money.
         | 
         | Most hedge funds don't gamble, but some do have poor risk
         | management (e.g. Melvin Capital).
         | 
         | The proposition of a hedge fund is actually very compelling to
         | institutional money: range-bound returns in any type of market
         | environment. This proposition bodes very well for say major
         | pension funds that want to avoid market risk while also
         | modeling out return + pension liabilities at an assumed rate of
         | return.
        
           | nabla9 wrote:
           | There should be another 10 year bet based this.
           | 
           | Take some risk profile and then bet that low cost
           | automatically balancing stock/bond Vanguard fund beats 90% of
           | hedge funds over 10 years based on risk adjusted return.
        
             | pfortuny wrote:
             | But this risk-adjusted thing is just silly: either you have
             | the money or you do not. I do not care about the risk.
        
               | Galanwe wrote:
               | > But this risk-adjusted thing is just silly: either you
               | have the money or you do not
               | 
               | Money is not a limiting factor, risk is. If you have a
               | low risk strategy, you won't have problems borrowing
               | money to invest in it.
               | 
               | Its not silly, because the amount of reward depend on
               | amount of risk.
               | 
               | So, if you compare returns of different strategies/funds,
               | you need to first rescale them to the same amount of risk
        
               | fractionalhare wrote:
               | Do you believe the following investments are equally
               | attractive?
               | 
               | 1. You invest $100,000 into a fund which has a 1% chance
               | of returning 100% and 99% chance of returning -100% each
               | year.
               | 
               | 2. You invest $100,000 into a fund which has a 20% chance
               | of returning 100% and a 80% chance of returning -100%
               | each year.
               | 
               | The possible payouts are the same. The expected values
               | are not. Given the opportunity to invest in both with no
               | difference in fees or other structure, would you leave
               | your decision up to a coin flip?
        
               | [deleted]
        
             | the_drunkard wrote:
             | > Take some risk profile and then bet that low cost
             | automatically balancing stock/bond Vanguard fund beats 90%
             | of hedge funds over 10 years based on risk adjusted return.
             | 
             | That would be a closer "apples to apples" comparison vs.
             | Buffett's bet.
        
         | Galanwe wrote:
         | > The fact that hedge fund managers live from the fees tells
         | what they really think about their skills.
         | 
         | Hedge funds have both management and performance fees.
         | Management fees exist because whatever the result, there are
         | employees that worked to deliver it. I don't see why you think
         | that I appropriate.
        
           | nabla9 wrote:
           | From the investor point the work they do is not worth of it
           | as this bet demonstrates.
           | 
           | Performance fees are never structured so that incentives
           | align. You will eventually get high-water mark (HWM)
           | performance fees just because there is random fluctuation.
        
       | bidirectional wrote:
       | I feel as though both arguments presented only in passing mention
       | that this is a bet on funds of hedge funds, rather than hedge
       | funds themselves. These are products which allow unaccredited
       | investors to invest in hedge funds indirectly, with the (massive)
       | caveats that they are paying two layers of fees and have no
       | ability to choose which funds they are interested in.
       | 
       | This is _very_ different to a bet against hedge funds or even an
       | argument against them. Hedge funds are designed to serve
       | sophisticated investors with complex needs.
        
       | [deleted]
        
       | yyy888sss wrote:
       | The good news is fees are slowly coming down as it becomes clear
       | most funds provide no value (in stability nor excess return) over
       | an index. In Australia superannuation (retirement fund) fees were
       | $30 billion last year, or 1.6% of GDP. Thats still a lot of money
       | going to small number of people who are not providing much value
       | over the funds charging 0.1%.
        
       | wslack wrote:
       | Buffett won and it wasn't close:
       | https://www.investopedia.com/articles/investing/030916/buffe...
        
         | bschne wrote:
         | If I understand this correctly, A--E are not individual
         | actively-managed funds, but actively managed portfolios of
         | actively managed funds?
         | 
         | It would be interesting to see the distribution of returns
         | among the contained funds. I lean heavily passive personally,
         | but at least if a not-insignificant fraction of funds
         | outperformed the index and were dragged down by really bad
         | returns in others, it would give some indication as to why
         | people would even _try_ to actively pick where to put their
         | money...
        
           | dehrmann wrote:
           | Not that it would have changed the outcome, but it was also a
           | notoriously bad decade for hedge funds. They usually say it's
           | because of a lack of volatility. It'll be interesting to see
           | if it stays that way, and if the Robinhood crowd will change
           | things.
        
           | aidenn0 wrote:
           | Except that as you reduce the sample size, you _expect_ to
           | have some outperform and some underperform. If you 100x pick
           | stocks at random, you will expect to see some fraction of
           | those 100 picks way outperform.
           | 
           | Any time you reduce the sample size, you increase the
           | variance, which gives the impression that skill is involved.
           | In fact from just looking at a single distribution of
           | outcomes it's not possible to tell if skill or luck is the
           | cause.
        
             | fractionalhare wrote:
             | There exist funds which have annualized a two-sigma return
             | over SPY for over 20 years. If you model returns as
             | approximating a normal distribution (e.g. just luck), and
             | you model years achieving a return at least two standard
             | deviations above the mean under a binomial distribution
             | (i.e. number of years they've been exceptionally lucky),
             | the likelihood of those track records existing are around 1
             | x 10^-37.
             | 
             | I would call that sufficient evidence to reject the null
             | hypothesis that the returns are normally distributed, which
             | is to say it's not luck. If you expand your sample size to
             | all investment vehicles throughout history, there still
             | haven't been anywhere nearly enough for such a track record
             | to emerge by chance.
             | 
             | Elementary statistics is well equipped to distinguish
             | between a distribution signifying luck and a distribution
             | signifying skill. It's structurally the same as assessing
             | normality, noise, randomness, etc.
        
               | riffraff wrote:
               | > There exist funds which have annualized a two-sigma
               | return over SPY for over 20 years
               | 
               | the problem is that _many_ funds have positive returns
               | until, suddenly, they don't. It's basically as hard to
               | pick a fund or money manager for the long run as it is to
               | pick a stock.
               | 
               | Consider Neil Woodford[0], he beat the market for over
               | twenty years and was considered the best investor in
               | Britain. Then started a new set of funds, which went
               | terribly. It'd have been reasonable to let him manage
               | your money, but it would still not have worked out.
               | 
               | [0] https://en.wikipedia.org/wiki/Neil_Woodford
        
               | fractionalhare wrote:
               | That doesn't refute the mathematics demonstrating that
               | people can reliably do this with skill rather than luck.
               | Eventually Brady's not going to be able to play football
               | professionally either. But he still does, and when he
               | can't do it anymore that won't indict his professional
               | record.
        
         | aphextron wrote:
         | And now we see that the point of hedge funds has nothing to
         | with long term investment growth, and everything to do with
         | short term personal enrichment. When you're playing with
         | other's money, you don't have to think about steady, decades
         | long growth. You just have to nail one big return and make
         | yourself rich on fees.
        
       | fgimenez wrote:
       | I chatted with an affiliate of the counterparty to the bet here -
       | a couple years before the bet ended but clearly when they were
       | gonna lose. They did say two interesting things I'll relay here
       | without necessarily agreeing:
       | 
       | 1. Their major thinking is that the growth of index funds is
       | driven by volume of new investors, not necessarily market
       | performance. At some point we hit the diminishing returns of new
       | money into indexes. When that happens we'll see their
       | "guaranteed" growth slow and you'll need to turn to hedge funds
       | for alpha. He thought 10 years was enough for this to play out.
       | Obviously wrong on timing, but not necessarily wrong on outcome.
       | 
       | 2. One of the conditions of the bet was that they have lunch once
       | a year to discuss bet progress. Given that charity lunches with
       | Warren are going for 4.5mm today, they essentially got 10 lunches
       | for 100k each. That is...quite valuable for a hedge fund manager.
       | 
       | Now, nobody can sell a loss better than a hedge fund, so I take
       | with a grain of salt. But it is some food for thought.
        
         | tybit wrote:
         | On 1; Is there any data to suggest that inflows to index funds
         | are pouring significantly more money into companies within an
         | index than if people invested directly or with hedge funds?
        
       | newintellectual wrote:
       | It wasn't so much a bet against the concept of hedge fund as it
       | was against particular people's abilities.
        
       | jwally wrote:
       | There should be a fund that guarantees a return in excess of an
       | index (adjusted for fees).
       | 
       | In exchange the fund managers would get fees and excess returns
       | on their clients capital.
       | 
       | This way instead of arguing over which approach is better, both
       | groups can benefit from one another.
       | 
       | An example could work like this:
       | 
       | Someone (Goldman, why not) starts a fund called the AlphaPlus
       | fund. Its a mutual fund. You pay a 10% up front commission to get
       | into it, and can withdraw your money whenever you want. Goldman
       | promises to return the exact same as the S&P 500 * _PLUS*_ 1%
       | apr.
       | 
       | Say I hold for 5 years and want to get out. The S&P goes up 10%
       | per year during that time. Goldman owes me whatever an 11% rate
       | of return on whatever I invested up front.
       | 
       | Say I hold the fund for 5 years and want to get out. The S&P has
       | a rate of return of -12% apr. Goldman owes me a -11% rate of
       | return on my principal.
       | 
       | Goldman does this because they get a fat 10% upfront fee from me,
       | plus they can use their super-wizard skills to invest my money in
       | something that returns like 30% apr. Thus, their profit is fees +
       | however much they can beat the market by (and the 1% they owe
       | me).
       | 
       | (edited to give better example given access to keyboard)
        
         | mettamage wrote:
         | Could you give an example? I am rereading your sentences but I
         | just don't understand what you're saying. I feel silly, but I
         | really don't get it.
        
         | nabla9 wrote:
         | You don't get excess returns without risk. If you want
         | guarantees, it will cost you extra. Nobody manages your money
         | for the kindness of their hearts.
         | 
         | Several funds have performance fees. It's typically the high-
         | water mark (HWM) fee for profits above reference index returns.
        
         | missedthecue wrote:
         | Almost all hedge funds have a hurdle rate
        
         | bidirectional wrote:
         | This is called a hurdle and many funds use them. Buffet's bet
         | was against funds of funds which are basically indices tracking
         | certain hedge funds, not hedge funds themselves.
        
         | CapriciousCptl wrote:
         | Ironically Buffett started with exactly this over half a
         | century ago-- setting a cumulative hurdle rate of 6%-- meaning
         | he wouldn't take fees unless investors made at least 6%. He
         | beat the Dow (S&P 500 wasn't really a thing during the Buffet
         | Partnerships) every single year.
        
       | dang wrote:
       | Discussed in 2010:
       | 
       |  _The biggest bet on longbets.com: $1,000,000_ -
       | https://news.ycombinator.com/item?id=1439613 - June 2010 (32
       | comments)
        
       | fractionalhare wrote:
       | Buffett won. However, several caveats apply when using this bet
       | to draw conclusions:
       | 
       | 1. Buffett bet against aggregate performance of hedge funds as an
       | investment vehicle. If he restricted his focus to the highest
       | performing funds of the past 10 - 30 years, he would have lost
       | handily.
       | 
       | 2. Buffett used absolute returns as the performance metric, not
       | risk-adjusted returns. A portfolio with lower absolute returns
       | but a significantly better idiosyncratic risk profile (and
       | correlation to market/beta) can be superior to a portfolio with
       | higher absolute returns but also higher risk.
       | 
       | Taken together, this means that Buffett's bet is a statement
       | about the aggregate performance of the industry. It is not
       | instructive for what performance is possible, or even for whether
       | or not you should invest with the modal hedge fund (given the
       | opportunity). It depends on investment goals and risk needs. It's
       | also worth pointing out that "risk needs" is multi-dimensional,
       | not just a sliding scale of how much e.g. leverage you're willing
       | to accept. There is an entire sub-industry of hedge funds which
       | explicitly expect to underperform on an absolute basis for long
       | periods of time, but which service their clients with highly
       | bespoke risk products. Clients are frequently well-informed and
       | happy with this arrangement.
       | 
       | I say this because there is a tendency for people outside the
       | industry to come away thinking hedge funds are a scam.
       | Which...well, many are, to put it bluntly. But it's a lot more
       | complicated and this isn't really the smoking gun you'd think it
       | is.
        
         | Judgmentality wrote:
         | > 1. Buffett bet against aggregate performance of hedge funds
         | as an investment vehicle. If he restricted his focus to the
         | highest performing funds of the past 10 - 30 years, he would
         | have lost handily.
         | 
         | I don't think this is a caveat. I think this is the point. You
         | don't compare yourself to the literally one guy who won the
         | lottery, you compare yourself to everybody that bought a
         | lottery ticket.
         | 
         | > I say this because there is a tendency for people outside the
         | industry to come away thinking hedge funds are a scam.
         | Which...well, many are, to put it bluntly.
         | 
         | I don't think anybody is assuming every hedge fund on Earth is
         | a scam from this any more than they think lottery tickets are a
         | scam. As you mentioned yourself:
         | 
         | > Taken together, this means that Buffett's bet is a statement
         | about the aggregate performance of the industry.
         | 
         | I apologize if I'm being presumptuous, but is this not so
         | obvious that it can be assumed?
        
           | fractionalhare wrote:
           | I was probably a little unclear. Basically I'm saying _all_
           | you can take away from this is a statement about aggregate
           | performance. You 're not doing this in your comment, but I
           | frequently see people on HN extrapolate this bet to support
           | the idea that there's no such thing as a hedge fund which
           | beats the market, or which is a worthwhile investment, etc.
           | 
           | You can't derive a conclusion about individual hedge funds
           | from this. That might seem obvious to you, but maybe you'd be
           | surprised then :)
        
             | Judgmentality wrote:
             | > That might seem obvious to you, but maybe you'd be
             | surprised then :)
             | 
             | Fair. I've been surprised by the ignorance of people
             | before, including myself!
        
         | pfortuny wrote:
         | The lesson I take from the bet is: you can only be very smart
         | if you have a lot of money. Otherwise, do no try in the long
         | run*. And I stick to that (because I just want to keep a living
         | in the future, not to be rich).
         | 
         | "Risk-adjustment" is just another metric which makes not much
         | sense: either I have the money or I do not. Money now is worth
         | more than possible money tomorrow.
         | 
         | About "the highest performing funds of the past 10 - 30", which
         | ones, the two first ones, the Medallion fund? those which
         | cannot be used by ordinary people?
         | 
         | I know Buffet is not exactly the paradigm of "ordinarity" but
         | nevertheless, I think his intention with his stubborn support
         | of "just the market" is to teach that "ordinary people can very
         | seldom outperform the market".
        
           | fractionalhare wrote:
           | _> Risk-adjustment " is just another metric which makes not
           | much sense: either I have the money or I do not. Money now is
           | worth more than possible money tomorrow._
           | 
           | If you think risk-adjustment doesn't make sense as an
           | evaluation metric, you should just sell naked puts or calls
           | on a stock which doesn't seem volatile. You're going to
           | generate spectacular returns for a while. Then you're going
           | to blow up.
           | 
           | On the other hand a portfolio with relatively low
           | idiosyncratic risk and low market correlation (beta) might be
           | safely levered up to a higher absolute return than e.g. SPY
           | with less overall risk and volatility.
           | 
           | Like I said...it's complicated.
        
           | betterunix2 wrote:
           | "Money now is worth more than possible money tomorrow."
           | 
           | That is antithetical to investing...
        
         | dhosek wrote:
         | But that assumes that one could predict in advance what those
         | highest performing funds would be. Of _course_ the highest
         | performing XXX will be above average. The point is that no one
         | can consistently predict which ones will be the highest
         | performing XXX. Worse still, regression to the mean indicates
         | that if, in 2021 you invest in the highest performing XXX of
         | the preceding X years, you 're more likely to get returns
         | _below_ average.
         | 
         | And let's suppose that there really is a fund staffed by a
         | group of super-geniuses who can reliably pick the best
         | performing stocks. There are two possibilities: They take on
         | more and more investment capital until their returns end up
         | getting closer to the mean or they don't accept new investments
         | and the hypothetical new investor is left out in the cold.
        
           | fractionalhare wrote:
           | No I didn't assume that, I fully agree with you. Funds which
           | are capable of consistently (and safely) beating the market
           | on an absolute basis eventually cap their AUM and return
           | outside capital.
        
         | mooreds wrote:
         | > Buffett bet against aggregate performance of hedge funds as
         | an investment vehicle.
         | 
         | He let an expert pick the funds of funds. AFAIK, he didn't
         | restrict which funds the expert picked.
         | 
         | > If he restricted his focus to the highest performing funds of
         | the past 10 - 30 years, he would have lost handily.
         | 
         | This is like saying "If I only bet on the teams who won the
         | world cup, I would always make money". Past performance is no
         | guarantee of future returns.
         | 
         | > this isn't really the smoking gun you'd think it is.
         | 
         | If the bet wasn't the best way to show the relative value of
         | these investments, is there a better way? Or is the answer
         | really "if you need a hedge fund as part of your portfolio, you
         | probably aren't coming to HN for investment advice"?
        
           | fractionalhare wrote:
           | _> Or is the answer really  "if you need a hedge fund as part
           | of your portfolio, you probably aren't coming to HN for
           | investment advice"?_
           | 
           | Yeah, that's basically the answer. Retail investors don't
           | typically need to optimize their portfolios with bespoke
           | investment vehicles. Their exposure and goals aren't
           | complicated.
        
         | rohit89 wrote:
         | > There is an entire sub-industry of hedge funds which
         | explicitly expect to underperform on an absolute basis for long
         | periods of time, but which service their clients with highly
         | bespoke risk products. Clients are frequently well-informed and
         | happy with this arrangement.
         | 
         | Care to expand on this with some examples?
        
           | fractionalhare wrote:
           | Sure - off the top of my head, basically any fund or advisor
           | which specializes in derivatives volatility. Universa
           | Investments is a specific example, but you can find more by
           | searching for those criteria.
        
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