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Comment by gavman | Hacker News Reader

> "Comparing hedge funds and the S&P 500 is a little bit like asking which team is better, the Chicago Bulls or the Chicago Bears. Like the Bulls and the Bears in the Windy City, hedge funds and the S&P 500 play different sports."

That, to me, is a CRAZY statement to make. Both ETFs and hedge fund are financial funds that a person considers putting their money in with the intention of maximizing their return. To say that they "play different sports" is at best stretching the truth, at worst a lie.

> "The unexpected strength of the S&P 500 was a key contributor to Warren’s victory. Despite trading for a high multiple of earnings and facing an elevated level of risk, the S&P 500 performed in-line with historical averages."

So the "unexpected strength" came from performing "in-line with historical averages"?

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> Both ETFs and hedge fund are financial funds that a person considers putting their money in with the intention of maximizing their return.

Retired investors are often more concerned with preservation of capital than they are with maximizing return. If you have a couple million in the bank and are withdrawing 4% a year to live on, you're probably more concerned about the SP500 dropping 50% than you are with making an additional 1% on your money.

> If you have a couple million in the bank and are withdrawing 4% a year to live on, you're probably more concerned about the SP500 dropping 50%

And then you have illustrious hedge funds that go out of business when the SP500 suffers a small blip [1]. In any case, paying 2-5% to a hedge fund doesn't seem very good business when you're withdrawing 4% a year to live on.

[1] https://en.wikipedia.org/wiki/Long-Term_Capital_Management

LTCM was a special bunch though, especially because of the astounding amount of leverage at play.

There are certainly more modern examples like Pershing Square which bet big on Valeant, Chipotle and (short) Herbal-Life.

If you notice, the common trend seems to be lack of risk mitigation.

The economic models of risk that most hedge funds use are...odd.

The lack of risk mitigation is perfectly rational because of the lack downside. If a manager creates a hedge fund that has a 10% chance of making $1 billion and a 90% chance of losing $50 billion, he's got a 10% chance of making $200 million and a 90% chance of making $0. That means his expected return is $20 million for a fund whose expected return is -$44 billion.

I'd like to understand what you mean by those numbers. Why does the manager's numbers for gain/loss differ from the fund's?

Because the fund manager's downside is capped at 0. Bankruptcy heals many ills.

Also because of the survivor effect: if 3 hedge funds do poorly and one does incredibly well, guess which fund manager gets interviewed on the news. And don't be surprised if the analysts decide that half of the funds were incredibly successful (since 2 of the 4 were really in a different category and shouldn't count).

I'd put downside capped at 0 and bankruptcy in different groups. At the very least you lost time. You probably also had some investment in the business. Downside capped at 0 would be some opportunistic investment using spare cash with a gain or 100% return guarantee.

But, you get the carry of some percentage which should pay for your time.

2 and 20. His scenario is a little contrived though

also, LTCM managers were partners in the firm.

You're kidding me, right?

What do you think "hedge" fund means?

Good luck on the next job if you lose a firm $44B

To be fair,I would pretty pissed off if I invested with Bill Ackman and he followed standard risk mitigation and diversification strategies.

The idea is to get concentrated exposure to stuff that's not just equivalent to being long the whole market.

That's why nobody invests all if their money with Pershing Square. It's just not what the fund is designed to do.

The idea of "hedge" fund is also to hedge their bets and preserve capital in-case of downside. Ackman doubled down on his biggest losing bet (Valeant), actually more than quadrupled down by taking up exposure to options that were almost worthless when he unwound the position.

The "hedge" part of "hedge fund" is a misnomer. The defining feature is that they're lightly regulated.

Historically, "hedge fund" was named after a private fund that did pairs trade by shorting one security as they long other to hedge their losses in a downturn or broader market decline.

Modern hedge funds use futures, swaps and derivatives to the same effect, hedge in "hedge fund" is in no way a misnomer and being lightly regulated is a direct consequence of them being limited partnerships which are not open to public or non accredited investors and not the other way round.

>Retired investors are often more concerned with preservation of capital

Retired investors should have a few years of draw-down available in low-risk investments to mitigate market risks. In retirement there should be very little dependency on market forces.

If you have a couple million in the bank that you're drawing down at 4% then why do you care what the S&P is doing even if you have another couple million there?

Depends entirely on when they plan to retire and life expectancy.

Yields went negative during the crisis and with 10 years since, have only returned to 75 to 100 bps while real interest rates still lie below 0%. 4% withdrawal rate with zero earnings/dividend/asset appreciation isn't very sustainable even with "a couple million" depending upon where they live and how big of a cushion they want.

Also - let's not forget that during a crisis, there can be a run on the bank which could lead to liquidity crisis where a bank might have it's position unwound in unfavorable terms where not everyone gets back what they put in. Even FDIC only insures 250k per account per bank, AFAIK.

You can in theory be retired for a very long time 115 - 55 = 60 years. IMO, you should at least target a 5% survival chance which likely puts you out 30+ years if you retire mid 60's.

>Both ETFs and hedge fund are financial funds that a person considers putting their money in with the intention of maximizing their return. To say that they "play different sports" is at best stretching the truth, at worst a lie.

They're playing different strategies. If you're a defense-driven team you play to win primarily be keeping the other team (call them the black swans) from scoring. To bring it out of metaphor, it's about risk-adjusted maximum return.

If you're an offense-driven team you're trying to put more points on the board. The S&P 500 is a decidedly long bet on 100%, large cap, primarily western corporate equities.

>So the "unexpected strength" came from performing "in-line with historical averages"?

Hedge fund guys are usually bears and as such they've successfully predicted 9 of the last 5 recessions. They're perpetually prepared for or waiting for history to be proven wrong. It is within that context that they are seeking a maximum return (and justification for high fees).

Just to be clear, you are agreeing with the post you responded to, right? That is, they are both playing the same game, but hedge funds use a different strategy.

Which is the point here. Their strategy is evidently a losing strategy. (Or, rather, suboptimal.)

* Their strategy is evidently a losing strategy. (Or, rather, suboptimal.)*

It was not their strategy that competed and lost. It was the strategy of paying them to play the game for you. Their strategy of running a hedge fund instead of an S&P 500 index fund could be working out very well for them.

Touché.

Hedge funds run that gamut from "bears" to "bulls", from value to speculation, from public equities to private equity and bonds and commodities. Renaissance is a market maker.

The only thing that "Hedge Funds" have in common is that they are private investment partnerships, and typically charge a percentage of assets plus a percentage of profits for their services. Based on their charters they can invest in many different ways.

Historically the term "hedge fund" arose because there was a popular class of private investment partnerships that sought to provide good risk adjusted returns by remaining hedged against possible market collapses. But those types of hedge funds are a small minority, and the label has lost all value.

Ted Siedes knows all of this, because he runs a fund of funds where he adds his own layer of fees to "hedge fund" fees in order to get his clients into the "best" funds. He's been selling the myth of "hedge fund" outperformance for a long time, which is why he made this bet. He's drinking his own koolaid, and it turned out to be made in Jonestown.

>They're playing different strategies. If you're a defense-driven team you play to win primarily be keeping the other team (call them the black swans) from scoring. To bring it out of metaphor, it's about risk-adjusted maximum return.

Yes, but that still reduces to a metric applicable to both investments; it just means you can't compare on return alone.

If hedge funds produce a slight higher return by but by taking significantly greater risk, that would be a legit strike against them.

  > they've successfully predicted 9 of the last 5 recessions

Have you transposed the numbers or is this an amusing reference to something?

It's probably saying that they invest as though recessions that didn't happen were going to happen.

That. It's an old joke about bear investors.

But as an investor, I'm not playing different sports. I'm looking to maximize returns while minimizing losses. A defensive team and an offensive team may have different strategies but their goal is the same: win the game.

Are you saying that "risk-adjusted maximum return" is essentially (rate of return, std. deviation), and that hedge funds are offering a lower rate of return in exchange for a lower std. deviation? Like how Treasury bonds offer (1%, 0)? I'm no hedge fund expert, but I've always assumed hedge fund claim to get higher rate of return than the S&P 500 through the brilliance of their active management (for which you pay them gobs of money). And in this experiment, over 10 years, the deviation of the S&P 500 compared to its expected average was about 0, and their returns (net fees) was about 25% the S&P 500. So even if the S&P 500 had less than average returns it would have still trounced the hedge funds.

Maximizing returns while minimizing losses is, ultimately, a meaningess phrase.

What you mean is maximizing returns under some specific risk acceptance. That risk acceptance is different between hedge funds and other funds. You choose the fund that matches the game YOU are playing.

I mean, he's a hedge fund investor. This is as pure of an illustration of Sinclair's quote about the difficulty of getting someone to understand something when their salary depends on them not understanding it as you're likely to find. Ted Seides wouldn't make the crazy amounts of money he no doubt makes if most people didn't fall for the hedge fund scam.

I agree with your first comment, but for the second: I think that means that high earnings multiples and elevated risk would normally result in returns lower than, rather than in line with, the average. So he expected what he thought would be the consequence of overvalued markets, but got averages instead.

Outside the context of this bet, there's quite a lot out there on whether unusually high multiples (I think the really popular one for discussions is Shiller's CAPE) do or do not predict returns, or whether they predict anything at all. The opinions usually range from "the market says this is the right price for this risk, so it must be right" to "we're going to crash", but it's not all that clear who's right. (I think Shiller's right about overvaluation—I'm not sure what Buffett thinks.) But it's a pretty old topic, so that one is definitely not something he made up just as an excuse.

They are playing different sports. Hedge funds aren't really about maximizing your return, they are about maximizing the profit of the firm that manages it. That could mean making customers happy by maximizing their revenue, but if they can just do a good enough job and convince their customers that they are doing an excellent job by taking advantage of imperfect market information (the market in this case being money managing), then they can extract the most amount of money sustainably from their clients.

Alternatively they could just use an index fund, and their customers would be better off, but then they would have to convince those customers they were providing enough value to equal their fees, which would be hard, and would likely result in many lost customers.

He's saying that since the S&P is at a higher multiple, you'd expect returns to diminish since presumably its too high to keep growing quickly (and, potentially, turn into a bear/down market). So by performing at average, its actually out-performing what you'd expect given the conditions.

(Of course that's the theory, clearly the market isn't solely governed by its multiple and risk level)

They're two tools in the same toolbox. Yes, it might be weird to answer a question like, "Is it better to spend more money on a cordless drill or on a circular saw?", but people actually - and I think legitimately - ask questions like this all the time.

I'm trying to balance a group of concerns against a limited set of resources. How do I make intelligent compromises to get most of what I want and hopefully all of what I need?

All this answer tells me is that Ted is out of touch with the practical concerns of people of limited means.

In that sense, airplanes and bicycles are all vehicles.

I think in the context of the article, that hedge funds over ten years would outperform the index, it is more appropriate to say that hedge funds are bicycles that look like aeroplanes

modern reading of entrails.

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