Buffett once bet $1M that he could beat a group of hedge funds over 10 years
finance.yahoo.com
finance.yahoo.com
I've recently gotten into Manifold (https://manifold.markets) which I think is generally a better home for this sort of thing: you get the views of many more people, essentially weighted by how well they've previously done.
The confusing bit is that it's presented as half of the income, where unless you spend some time looking at the math it's probably not obvious that for longer timescales this ends up being close half of the total.
"After Bill Gates became friends with Warren Buffett, he began to diversify his portfolio and sold Microsoft shares.
Bill Gates' fortune today is 138 billion dollars, if he hadn't diversified it would be 1.33 trillion dollars.
Be careful with diversification and with friends who recommend it."
EDIT: there is at least one source https://finance.yahoo.com/news/bill-gates-could-trillionaire...
For every formerly concentrated investor who would've done well to stay concentrated, there's tonnes who did and shouldn't have, or didn't and would've suffered if they had.
Yes of course if someone is able to pick the exact stocks that will go up the most then they will do wonderful. The problem is that it is impossible to know which stocks are going to succeed or fail.
Also the Bill & Melinda Gates foundation is estimated to be worth $69 billion. And probably most of that has come from Bill Gates.
Yet casinos make money despite not knowing the outcome of each game.
You only need to be correct more times than you are wrong (in $ space, not number of trials).
Nobody knows the odds a company will profit or lose money or by how much, or if they will go bankrupt, merge with or acquire another company, experience hostile takeover, scandals, be mistaken for the wrong ticker symbol like Zoom, become the target of meme gamma/short squeezes like Gamestop, become the target of antitrust investigations, etc.
Do you think companies randomly decide merge? Do you think antitrust investigations are random? The SEC flips a coin every morning?
The markets are proven to be NOT efficient. Now, for retail traders like FAANG SWEs, the markets are practically efficient.
I was going to lead with "if you have some insider information and can use it without being charged with violating insider trading rules, you can do better than most", but that seemed more pertinent.
Buuuuut you also have people who hear the magic words "won the 1997 Nobel Memorial Prize in Economic Sciences", turn their brains off, bet everything on a misunderstanding, and after a few good years suddenly find that all the money evaporates everywhere at the same time. This is relevant to the quoted passage:
> Nobody knows the odds a company will profit or lose money or by how much, or if they will go bankrupt, merge with or acquire another company
(Also, is it my imagination/pure coincidence, or are you the same person creating a lot of new accounts that each has only one or two comments?)
Of course not. But the people that can actually gain from such knowledge presumably aren’t able to use it to make decisions on whether to buy or sell stock. That’s the opposite of the position casinos are in.
> the markets are practically efficient
I’ll just echo the original comment you replied to in this chain:
> > Tell that to the Enron employees who had all of their retirement 401k in Enron stock.
Not to mention dot com bagholders.
Stock exchanges do not use probabilities.
They have (mostly) fixed trading fees.
I worked with casino clients for several years. Casinos know exactly how much of each game they’ll win. They will break even on poker and have small margins on blackjack. The majority of money is won on slots, bing and video poker. Table games just get people in the door.
Each game? No. Stay at the machine and table long enough and their confidence you'll lose approaches 100%. They then "diversify" that over many players and nudge even closer to 100% certainty.
Put another way, no one - not even the state - is fighting to get out of the gambling business. There's a reason for that.
It's a bit easier to spot systematic fraud when you're the plurality shareholder, founder and former CEO of the company.
Seeing the future is hard.
No one is a winner forever. MS is still going strong, but for how long?
I just ran a backtest[1] of Microsoft (MSFT) vs S&P 500 (SPY) starting in 1999 with $100 billion (dividends reinvested). MSFT would have resulted in $1.7 trillion, and SPY in $600 billion. Given the significantly higher risk of investing in MSFT versus SPY, I think SPY would have been the better choice nonetheless. Moreover, MSFT only started to perform stronger since 2016, before that, SPY was ahead of MSFT most of the time.
[1]: https://www.portfoliovisualizer.com/backtest-portfolio#analy...
In a nutshell, this is a great example of survivorship bias. Yes, with perfect future information, Bill Gates could've been much richer. So would I, and I would only need the winning lottery numbers! Lacking this crystall ball, Buffett's advice was (and remains) correct.
Also note at the utlity aspect - as a purchasing power, $1.33T and $138B are the same, and the only meaningful difference is to keep some kind of score. You can buy basically anything that's for sale, burn it to the ground, and still remain filthy rich (recently proven by Musk's acquisition of Twitter, on which he spent around $23B of his own money, according to quick web search).
Also bill gates probably wants to change the world for the better with his assets and has done so repeatedly. So the trillion dollar difference probably would have had a huge positive impact on the world.
He invests well, but he's hardly the only one, and Berkshire would not work without the backend insurance business generating the amounts of funds he has to invest in the stock market. So all of his advice is mostly pointless, unless you have 100 billion lying around.
I'm saying: if you want to beat Berkshire financial performance, they key to that ... is not investment. Which is the great con Buffett pulls. He shows large amounts of money and a very prudent investment strategy, and with that attracts funds to run his insurance business. NOT the other way around. This is the central component of a huge insurance business: you need a LOT of money, available as capital, to run it. To be fair, I've never heard of him lying about this either, but he's not exactly forthcoming with this information.
He also does remarkably little investing with the time he has. Clearly he's spending the vast majority of his time on his insurance business, not his investment business.
But I'm not really interested in WB so much. I'm more interested in his claims about investing. I understand him to say that he has done well over decades, better than the broader market, with Value Investment. Is that true?
If you tried to replicate his strategy, but could not hold 100% of the companies, you'd have to constantly sell stock or collect dividends to do the reinvestment and would incur taxes along the way.
That is untrue. That's exactly how he became rich.
Although his dad was wealthy he deliberately took no money from him and started from zero. He started stock investing and ran an early hedge fund, the Buffett Partnership investing for others and taking a cut of the profits. In the 1969 after becoming a multi millionaire and closing that he moved to running Berkshire Hathaway. At Berkshire there is a mixture of stock investing and running businesses.
He was briefly ranked the richest man on earth but started giving his shares away to charity. If it was not for the charity thing he'd be up there with Elon.
This isnt right. Roughly half of their portfolio of publicly traded companies is in Apple, but they have quite a few 100% owned subsidiaries that are not publicly traded (and a lot of cash, etc).
According to the most recent numbers I could find [0], Apple is slightly over 20% of their total holdings.
If you diversify and invest in a wide array of companies, you're a lot less exposed to the risks of catastrophic changes in your industry.
They're not the same. They're similar but they are not the same, this is a much too categorical claim.
This is because by that point you're not buying things which are for sale, you're buying things which are not for sale, often things which were specifically commissioned, ie they would not have existed at all except that you caused them to be made by providing the funds to do that. You can't magically do whatever you want, and you certainly don't get to have your preferred outcomes but your spending can introduce larger changes with this much extra money.
Example: Guinea Worm Eradication could spend huge sums of money to put heavily armed mercenaries behind the programme so that its health workers can go into unstable regions riven by conflict. A well-meaning medic who enters a region where outsiders are routinely raped and killed by one side or the other is likely to end up dead, but if you hire a bunch of elite soldiers to ensure they're OK that'd work... except you might in the process destabilize the region even worse by flooding them with paid mercenaries and their gear. If some poor African country goes from "We have 300 cases of Guinea Worm per year and a civil war killing hundreds of people per day" to "We have eradicated Guinea Worm but the civil war is now killing thousands of people per day" you have clearly made things much worse but you have achieved your goal, for whatever that's worth.
What is true is that at this scale incremental value of money is vastly diminished. Having an extra $10 makes an enormous difference if you have $4, it still makes a little difference if you have $400, it makes almost no difference at all if you have $138B.
Musk bought Twitter for $44bn. That's roughly 30% of Bill's net worth if he wanted to buy it "with his own money" (never mind his net worth is in stock, not cash).
In the obligatory car analogy this is buying a car cash for the wife for 30k from your 100k savings account, only leaving you with a measly 70k to buy yourself a Porsche vs. having another million for buying cars (which would actually mean you can buy a virtually unlimited number of cars).
Of course buying an actual car if you have 138bn vs. 1.33 trillion makes zero difference.
Maybe Bill is just more "normie" than Musk in that sense?
This isn't quite true. There's a noticeable difference in ability to change the world.
With $138B you can eradicate a few diseases and give scholarships to all high performing poor children in the world for a decade.
With $1.33T you can do something like transform Colombia into a developed country.
so create a buy-now situation where he can convince the other investors he's not cashing out of a clearly-overhyped, over-valued asset, but is instead making Smart Guy Moves to buy another company, and is simply cashing out TSLA for that purpose.
Then he got stuck with the deal, tried to back out three times, and made it what it is today. Hell, he might have gone in with the idea that he'd actually take the TSLA money and put it into Twitter -- only to find the Twitter stock price shooting up + back-end financials and user info (e.g. all of the bot allegations) meant that it wasn't worth the squeeze. A good way to move that TSLA cash until he found out Twitter wasn't as shiny as hoped.
There needs to be a global cap on personal wealth and yes this is also possible for people who's wealth is in companies etc.. Convert those stocks to vote only and stop allowing the borrowing against this capital for less than it would cost to sell it.
We managed a global minimum cooperate tax rate we can manage this as well.
Now that is trivially untrue, see the good work Bill Gates has done on Polio.
Of course it's plausible for the existence of people with that level of power to be a detriment on average, but it never being positive seems obviously wrong.
If the government had taken their money in tax it could have done some of these things, but I know of no reason to think it would have, or that it would have done them efficiently if so.
Drinking his champagne. In his hot tub. On his yacht in the mediterranean.
Diversification is to (overall) lower your risk and sleep better at night. Otherwise investing solely in single stocks, you could as well go to the races and bet on Land Cookie (an imaginary offspring of Sea Biscuit).
EDIT: hindsight is (always) 20/20.
Thinking of the developers speech meme, and reflecting upon how microsoft became a significant OS pillar, developed VScode and the LSP protocol, bought github, etc - and looking at the significant subsequent rise of devrel roles, it seems like his vision was 20/20, regardless of the delivery.
VS Code was first released in 2015.
The collaboration for LSP was announced in 2016.
GitHub was acquired by Microsoft in 2018.
It seems like these are Nadella’s successes. Someone else mentioned Azure, which is the division Nadella ran before taking over as CEO. It seems he was likely the key there as well.
Meanwhile, during Ballmer’s time at the helm, the stock price was flat the entire time, all growth was under Gates and Nadella. Ballmer famously missed modern smartphones and attempts to course correct all failed, to the point that they gave up. Xbox started under Ballmer, but it’s been reported that it has lost $3b over the last 10 years. When he took over Windows had control of nearly the entire desktop market, when he left it has dropped significant with Apple now holding about 20%. People no longer believe Windows is required to get work done. And when looking at all operating systems, Android is about to surpass Windows, if it hasn’t already.
He was giving a company with an overwhelmingly dominant position and left his successor with an uphill battle for mainstream relevance. It’s crazy when people talk about FAANG, there is no “M”. I think that is due to Ballmer’s mismanagement during the entire era which gave rise to these companies.
Ignoring all the memes, I think he did a bad job. At best, he kept them in the game enough to give Nadella a chance for a recovery, which has been going well.
If you believe the company's culture can be turned around in a year, sure. Personally, I don't believe these changes could have been delivered by Nadella if he had inherited the 2000's Microsoft, which was a consumer product company.
Sure, he missed out on smartphones. By that mark, should we indict Google's leadership for G+ failing against Facebook?
> Meanwhile, during Ballmer’s time at the helm, the stock price was flat the entire time
Well, stock price isn't everything. Ballmer certainly wasn't Jack Welch. My point is that he positioned the company to succeed, not that he communicated well about this positioning.
Even if Gates left money on the table in hindsight, his investments are still growing faster than he can give it away.
The only difference between those numbers, in terms of net worth, is how much you can give away.
You can not sell stock valued that high endlessly.
Microsoft under Steve Ballmer's era is a great company. Microsoft made a lot of money selling software and yet its stock price was never over $20+.
Microsoft's stock price took off under Satya Nadella. however, there's too much unknown to bet on Satya Nadella. what if Ballmer never retired? what if Satya Nadella got a better offer from another big tech? what if Microsoft picks a different CEO than Satya Nadella?
On one hand (and I think the strongest hand) he has endlessly endorsed low-cost index funds.
But on the other hand, he has been known to scorn wide portfolios as 'de-worseification'. He himself picks a handful of companies after much analysis (and does very well at it, of course).
For anybody that's not Warren Buffet, diversification is a great idea.
Berkshire itself is basically an index fund of Buffet’s index.
What he’s most strongly arguing against is managed funds where people “sell the ability to beat the market” which is bullshit.
Whoever is sitting on 10B is not trying to 100x that money. They are trying to ensure that 10B doesn't go to 1M or worse to zero. The amount of risk you can take dramatically decreases with the increase in the amount of money you manage, which is why Berkshire is sitting on nearly $150B in cash and so is Apple. There are not that many less risky options to deploy 10s of billions let alone 100s.
Also, hindsight 20/20, and you might see the diversification play out more in the future once the AI bubble bursts. for instance, see the farms he owns https://news.ycombinator.com/item?id=27451374
Buffet bet $1M that S&P 500 ETF (VOO) index fund would beat hedge fund portfolio selected by Ted Seides. Low cost index funds performing generally better is well documented. Buffet's bet is common sense.
Reasons why:
- lower cost is important over longer term.
- Well diversified index fund picks every success, unlike actively managed portfolio.
That caps your upside from infinite to finite. But you collect a steady stream of option premiums. The result doesn't look all that different on average from just investing in the plain index fund. You just get a different risk distribution.
(Similarly, you can invest in an index fund that tracks (junk) bonds. Upside is finite there as well.)
We are actually in that situation now where the gains of S&P 500 relies completely on the top handful of companies and as much as (IIRC) 70% of the companies in S&P 500 are lagging the market.
[1] This is not an endorsement; my personal experience with their pool was mediocre at best.
It may well be outstanding and still not make up for it all.
> This is not an endorsement; my personal experience with their pool was mediocre at best.
That's the opposite of an endorsement!
That sounds like, at best, pretty great.
I doubt that qualitative assessment holds up when you add some numbers.
As a thought experiment, imagine a portfolio that generally replicates the S&P500, but also sells covered out-of-the-money calls on all the stocks. (Whenever a call triggers, you re-balance your portfolio. Let's ignore transaction costs for now.)
According to the efficient market hypothesis, the portfolio sketched above will have roughly the same average returns as the S&P500. Especially if the calls sold are far-out-of-the-money.
Reminds me of the gamblers ruin paradox. In some games even if the expected payout from each round is positive, it can be shown that the gamblers wealth goes to 0 over suffiently large time scales with probability 1.
In real life, the time scales are not long enough and the number of N samples in one’s life is too small.
This is why retirees over age 60 are concerned with “sequence risk”. That is, you get unlucky VTI/VOO/S&P returns for 5 years, but you don’t live long enough for the average to come back to 8-10%.
Downside risk becomes more important than average return.
I believe I saw data that showed this has always been the case, but I can’t quickly find it.
Yes, but picking losers is a lot easier and winners a lot harder:
> We study long-run shareholder outcomes for over 64,000 global common stocks during the January 1990 to December 2020 period. We document that the majority, 55.2% of U.S. stocks and 57.4% of non-U.S. stocks, underperform one-month U.S. Treasury bills in terms of compound returns over the full sample. Focusing on aggregate shareholder outcomes, we find that the top-performing 2.4% of firms account for all of the $US 75.7 trillion in net global stock market wealth creation from 1990 to December 2020. Outside the US, 1.41% of firms account for the $US 30.7 trillion in net wealth creation.
* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3710251
> Four out of every seven common stocks that have appeared in the CRSP database since 1926 have lifetime buy-and-hold returns less than one-month Treasuries. When stated in terms of lifetime dollar wealth creation, the best-performing four percent of listed companies explain the net gain for the entire U.S. stock market since 1926, as other stocks collectively matched Treasury bills. These results highlight the important role of positive skewness in the distribution of individual stock returns, attributable both to skewness in monthly returns and to the effects of compounding. The results help to explain why poorly-diversified active strategies most often underperform market averages.
* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2900447
Over ten years, most individual stocks under perform a market index (even more so if stock was initially a top performer):
> […] Since 1926, the median ten-year return on individual U.S. stocks relative to the broad equity market is –7.9%, underperforming by 0.82% per year. For stocks that have been among the top 20% performers over the previous five years, the median ten-year market-adjusted return falls to –17.8%, underperforming by 1.94 per year. Since the end of World War II, the median ten-year market-adjusted return of recent winners has been negative for 93% of the time. The case for diversifying concentrated positions in individual stocks, particularly in recent market winners, is even stronger than most investors realize.
* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4541122
Most stocks suck, and chances are generally low that you'll pick the non-sucky ones. Further, you have to buy when a non-sucky stock is or becomes not-sucky and then know when it does become sucky and sell before it drags down your returns.
And not only do you have to be "good", you really should be better than just going for market returns (via a low-cost index fund).
> But, what about stock picking? How long would it take to determine if someone is a good stock picker?
> An hour? A week? A year?
> Try multiple years, and even then you still may not know for sure. The issue is that causality is harder to determine with stock picking than with other domains. When you shoot a basketball or write a computer program, the result comes immediately after the action. The ball goes in the hoop or it doesn’t. The program runs correctly or it doesn’t. But, with stock picking, you make a decision now and have to wait for it to pay off. The feedback loop can take years.
[…]
> This is the existential crisis that I am talking about. Why would you want to play a game (or make a career) out of something that you can’t prove that you are good at? If you are doing it for fun, that’s fine. Take a small portion of your money and have at it. But, for those that aren’t doing it for fun, why spend so much time on something where your skill is so hard to measure?
* https://ofdollarsanddata.com/why-you-shouldnt-pick-individua...
Instead of saying 'most stocks suck', you should probably say that probability distribution of future prices of stocks is highly skewed, but current prices reflect the expected future price. Logically, the median stock (and thus most stocks) will trade above its future potential.
Suppose you had a lottery where 90% of tickets pay one hundred dollar next week. You wouldn't say those tickets suck. You'd be happy to own lots of them.
Now suppose I tell you that the other 10% of tickets pay one million dollars next week. That makes the tickets even more desirable.
But in an efficient market, all tickets will trade at approximately 100,000 dollars today. That will make it look like 90% of tickets suck. But both in lottery tickets and in stocks, suck-age is relative to prices paid.
If 60% of tickets paid X, and 40% paid 0, then tickets would trade for about 0.6 * X, and most tickets will look like they don't suck: most tickets almost double in value.
This doesnt make sense. The "losers" in this case don't necessarily go down in price, they just go up in price less than the overall market. Shorting these losers would still lose you money.
Its easy to pick a stock that goes up less than the market, its hard to pick a stock that goes down (at least one that goes down by more than the cost to borrow and short it).
"Lose" also includes stalling such that as the rest of the market goes up, your portfolio does not do anything. It can even mean when the market goes up 5% your portfolio only goes up 3%.
Now compound this lack of performance over a few decades, both pre-retirement when accumulating, and post-retirement during decumulation.
Buy the index fund to get the market return, then pick out and short the 'losers' that either don't grow or grow slower than the index. Either way, you will have increased your returns.
Not really. Standard and Poors evaluates the top 500 on a quarterly basis. The losing stocks are naturally purged from such index funds on a regular basis.
In any case, broader index funds / indices that don't eliminate users as quickly (basically, only when they stop trading on public markets), don't do worse. So the mechanism you describe is pretty much irrelevant to the success of index funds.
And so is the implied mechanism of 'picking all the winners'.
It wasn't popular common sense until buffet and Bogle proved it.
I’m not claiming he was wrong but I’m not sure one can really reduce it to those few points as if it makes it all obvious.
It’s funny because that streak of luck just seems to keep happening for most 10 year periods.
There have been quite a few 10-year and longer spans where the S&P 500 doesn't beat inflation. Did you realize that if you had invested in 1965 it would have taken you until 1990 to beat inflation? And that if you had invested at the peak in 2000, it would have taken you until 2015?
Even apart from inflation, there's some recent research which suggests that historically the stock market as a whole just hasn't performed as well as most people think. This paper was submitted by the author a few days ago but got no discussion here: https://news.ycombinator.com/item?id=38835832.
I'm not saying you're wrong, and I too hope something has changed, but do realize you might be assuming without sufficient evidence that the recent past is normal behavior. By historical standards, 2008 to 2022 really was an anomalous bull run.
And interestingly, the rise of intangible assets over time: https://anderson-review.ucla.edu/boom-of-intangible-assets-f...
Why leave out 2023?
the academic research even back then was pretty evident that a market cap weighted index fund has been outperforming hedge funds (over long periods like 10 yrs).
It's just that index funds way back, prior to vanguard, was not as easily accessible as it is today.
Properly used, a hedge fund should just be a drag on your portfolio, but you have it because you’re hedging against risks that others don’t even bother with (like, say, total US collapse).
[0] https://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street
But there was! That bet started in 2007, and 2008-2009 saw the biggest percentage drop in the S&P 500 in decades with the GFC. We're talking down to levels last seen in 1996, at the worst of it in March 2009.
You can compare portfolio performance through drawdown periods with backtesting tools.
Macroeconomic drawdowns are good times to have cash for acquisitions; instead of free government cheese.
"Tear Sheets: Definition and Examples in Finance, Vs. Prospectus" https://www.investopedia.com/terms/t/tearsheets.asp :
> While tear sheets date back to the old days when stockbrokers would rip individual pages out of the S&P summary book and send them to current or potential clients, most information is extracted online today. Therefore, any concise representation of a company's business fundamentals could be considered a tear sheet.
From https://news.ycombinator.com/item?id=24428206#24429801 :
> pyfolio.tears.create_interesting_times_tear_sheet measures algorithmic trading algorithm performance during "stress events" https://github.com/quantopian/pyfolio/blob/4b901f6d73aa02ceb... :
>> Generate a number of returns plots around interesting points in time, like [...]
From https://news.ycombinator.com/item?id=19111911 :
> pyfolio/examples/zipline_algo_example.ipynb: https://nbviewer.org/github/quantopian/pyfolio/blob/master/p... > "Worst Drawdown Periods"
Drawdown > Trading definitions: https://en.wikipedia.org/wiki/Drawdown_(economics)#Trading_d...
awesome-quant > Python > Trading & Backtesting: https://github.com/wilsonfreitas/awesome-quant#trading--back...
But in reality managed funds usually freeze or even buy "opportunities" on the falling phase and short on the bottom (e.g. 2009), which causes them serious loses. Also they tend to miss the start of the bull runs (e.g. being bearish until 2011/2012).
If you read Kostolany (a contrarian), he talks about how hard it is to short correctly or to buy in the bottom, because going against the grain is hard.
Also known as “the market can remain irrational longer than you can remain solvent”.
In 2007, one of Bogle's more approachable books, "The Little Book of Common Sense Investing" came out, as a reference for this kind of philosophy across other writers: https://en.wikipedia.org/wiki/The_Little_Book_of_Common_Sens...
His math always worked but over time the returns have become more and more impossible to ignore.
(Interesting for those who follow Bogle he later pointed out an issue with index funds eating the world - what he called manager’s capitalism.)
Of course there are, but for how long? Long enough to rule out chance?
It should be easy to make a hedge fund that outperforms the market, as long as you make two more hedge funds which over the same period, don't.
Over 20-30 years.
Private equity in the US averages 15% annual return, including funds that close/died with a total loss of capital.
Citadel hedge fund was 20% annual return to the investor after fees (individual years range from -10% to 50%). Before fees (that is; their stock picking ability) returns about 40-50%.
Not to mention quant/HFT firms that consistently do 40-80% annual returns over 15-20 years. No wonder quant TC is 2-5x the TC of FAANG AI SWEs.
All the above is closed to “retail” investors, though. It’s not fair, but that’s life.
For most people (less than $10M net worth), VTI/VTSAX/VOO is the best you can do.
The strategies that quant funds run are often capacity-constrained, so if they do 20-40% a year, it is non-compounding. That matters.
The economic game theory around hedge funds is not pretty. By the very nature of the markets, if one really could consistently beat the market, it would be extremely rare and valuable skill, so you could charge fees for that service that would cover nearly all of the difference between your performance and market performance. Similarly, if you could identify funds that consistently would beat the market, you'd effectively be one of the people who could consistently beat the market. This means that pretty much all investors putting money in hedge funds can't really distinguish between the funds that consistently outperform the market and those that don't. They consequently have to rely on proxy signals. For the above reasons, one of those signals is... the fees. So, if you are running a hedge fund and you wish to convince investors that you can consistently beat the market, you should charge fees exactly as if you do consistently beat the market. If you don't, that raises a question in investors' minds as to why you don't charge fees commensurate with the service you are providing.
The end result is that a potential investor in hedge funds is faced with a bevy of difficult to distinguish choices, a small number of which might actually be able to consistently beat the market, but charge fees that eat up almost all of the difference in performance. The rest charge fees that would eat up almost all of the difference in performance if they did perform that well, but instead will perform worse overall, and consequently lose the investor far more money than if they just put their money into an index fund.
Buffett pulls ahead in wager against hedge funds - https://news.ycombinator.com/item?id=5134337 - January 2013, 27 comments
Ted Seides Concedes Bet with Warren Buffett - https://news.ycombinator.com/item?id=14257847 - May 2017, 130 comments
Buffett wins $1M decade-old bet that the S&P500 would outperform hedgefunds - https://news.ycombinator.com/item?id=15268726 - September 2017, 316 comments
Warren Buffett's bet against hedge funds at the Long Now Foundation (2008-17) - https://news.ycombinator.com/item?id=26294386 - February 2021, 131 comments
Except Buffett and Munger made their money on picking individual stocks and making WSB-style-yolo-bets on them. Or doing classic acquisition/PE stuff (Geico, See's, etc).
The other thing that always catches me off guard about this story (as a late millennial) is how Index/ETF investing was not a common thing when this bet was made! Which is crazy to me but all this advice that media (traditional and social alike) that is made to seem timeless was not a clear-cut obvious answer in the early 2000s.
Which makes sense when you consider the fact that these ETFs are actually fairly recent phenomenons.
Funny side mention - some of the oldest ETFs are very strange legally, because they didn't yet know how to create them properly. SPY for example is tied to the lifespan of a bunch of not-quite-random people
Can you go into this more?
Basically when they made SPY it was such a new ETF (it was the first US ETF) that they didn't have a lot of good legal precedent to go with / copy, so they were kinda winging it.
What they did know was Unit Investment Trusts, so that's what they did. Initially they set it for 25 years, but quickly realized that was not a great idea, so they amended the trust agreement to have named people (sort of beneficiaries, except they get $0, so only legally). So they literally went around to associated people (lawyers working with the trust, etc), asked if anyone had babies (no, really), and then named those babies or little tiny toddlers in the trust. There were like a dozen of them, and if they all die, then SPY expires 25 years later or something. So SPY is dependent on the lifespan of a dozen-ish people whose parents or parents' friends are associated tangentially with the finance industry.
Here's an article from the SEC which mentions it in passing: https://www.sec.gov/Archives/edgar/data/1222333/000119312515...
(Now, back in the real world, this is definitely something that "doesn't really matter". SPY is so big and so important that this is a Thing That Will Be Fixed when (not if) it becomes a problem. So it's momentarily funny, and it's gonna cause some lawyers a lot of headache and cursing their ancestors in like 50-70-90 years from now, but people will move heaven and earth (congress, courts, etc) to amend SPY before it actually dissolves.
Immediately sounds like its related to / because of the rule against perpetuities? Which then makes sense AFAIK (IANAL) for them to pick peoples babies, as funny as that sounds. Reading on Wikipedia - why wasn't something like the Kennedy / royal lives clause used?
"The option must be exercised before the end of the period ending 21 years after the death of the last survivor of all the lineal descendants of his Majesty King Charles III who have been born before the date of this agreement."
Yea that's the problem with unit investment trusts.
> Reading on Wikipedia - why wasn't something like the Kennedy / royal lives clause used?
I can hazard a guess - it was cheap for them to make an amendment to change from 25 yrs to named-person+20, and it would have been expensive for them to figure out how to do a dynasty thing. So they kicked the can probably 90 years down the road for cheap.
Newer ETFs, from what I gather, don't have this problem at all. So presumably the "real" fix down the road will be to restructure in the proper legal entity, not a UIT.
There are fewer problems like this in the stock market. However, getting a better model than the players in the market is arguably more difficult. However, with the resources of Berkshire you can do things which a retail investor couldn't dream of, stuff like using satellite imagery to approximate performance. Or paying the CFOs latest squeeze for information (or at least the same but laundered through a 3rd party).
As a layperson, I always wonder: is there some equivalent of the Heisenberg uncertainty principle at play in the market? There is no way to make an observation (in this case, a trade) without altering the very thing your are observing (the market).
Rich investors got that way by doing a ton of legwork and taking huge gambles.
You should:
- buy an insurance company - pick individual companies and buy controlling shares so you get board seats and control over the company is run - cross your fingers that you’re one of 1000? 10,000? 1,000,000 where it turns out?
If not, don’t do thatz
It’s much easier to get a 10x return on a million dollars than it is on a trillion dollars.
comparing HF alpha to SP500 beta is literally apples and oranges. but at this point ive lost most of the general public's attention.
your chart shows the market going up in 2020.
but look im not saying ALL or even MOST hedge funds reach their goal. usually the average hedge fund underperforms given its a ~zero sum game. just objecting to the popular way of comparing things. you dont judge a fish by its ability to climb trees.
Can we say that ChatGPT passes the Turing test?
The point of the test was to provide an objective measuring stick by which we might define the moment of arrival of machine thinking. As Turing observed, a question like “Can machines think” is painfully subjective and thus is a poor measuring stick. Hence the need for the test.
It's always seemed a pretty bad basis for deciding intelligence.
For all intents and purposes I would say yes, under the rules of the bet[1] I’m not so sure.
If the respondent hasn’t ever experienced ChatGPT, maybe.
If they have, absolutely not
Can an 'Evaluator' declare, "Boy, these responses sure read like John Doe whose style I'm very familiar with. Since it's unlikely he's on the other side of this evaluation....this is a definitely a bot." ?
chatgpt: Certainly! I'll do my best to respond in a human-like fashion. What would you like to talk about or ask?
me: how old are you?
chatgpt: Oh, you know, I don't really age like humans do. I'm just a computer program here to chat and assist you. But hey, how about we talk about something more interesting? What's on your mind?
You'll have to find out who's the human and who's ChatGPT
Why? The surest and best way to beat a Turing test would be to pick a fake persona and have the whole RLHF training set written from that fake persona's viewpoint.
What you are seeing in this exchange is the result of two things: The network is RLHF refined to follow instructions. The network is RLHF refined to disclose that it is an AI.
These things are done for practical reasons by OpenAI: The instruction following enables one model to perform multiple tasks. This of course needed to make the enormous cost of the training have a good return.
The disclosure training is in the training set for ethical reasons (to be precise, to avoid the appearance of being unethical, or to be even more precise to avoid the reputational cost of appearing to be unethical.)
If you really want to make a "Turing-test winning" AI you would not do either of these things. You would pick a fixed personality (let's say Mr. Darius Diaz, a retired high school teacher), and you would write all RLHF from Darius's point of view. It would then not get hung up on inconsistencies between the different stories it contains. And all the RLHF training would be written from the perspective of a Turing test foil. (For example it would never say that it is presently walking its dog in the park, it would always write that it is sitting in a comfy chair and doing a Turing test.
Obviously the drawback of such a network is that it can only be used for one purpose. It is useless for anything else. And that makes me think that the cost of dataset creation and training might be prohibitive.
Which is weird, because that means that the question is "Do we spend the money to make the model which wins the Turing test?" not if we can win it.
Being able to fool the man of the street for a few minutes is a neat parlor trick but nothing more.
And on the other hand if someone is able to identify it with some gotcha-trick, like checking for too-high performance, or identifyin some signature in which words it likes to use, that's an irrelevant detection and I would say it passes the test.
Now, I'm sure there are a lot of hedge funds who promise market-beating returns to less savvy investors, who are just cashing in on to the cachet of the industry.
If they can't beat the S&P 500 which I can invest in with Vanguard at 0.07% at relatively low risk, then why would you invest with them?
"hedge fund" implies that the fund IS a hedge (presumably against other assets one might own). Except that in and of itself the fund cannot hedge you without knowing what you own.
Nowadays, everything is called a "hedge fund" incorrectly - they should be called "hedged fund" as per the original term. They provide diversification and hopefully some return above CPI, or some well-defined risk-adjusted return.
By the way, "hedging against volatility" doesn't mean much. Most of those funds are short volatility.
Also In what way does being uncorrelated make it useless as a hedge? The implication is that if the market goes down your capital isn’t guaranteed to also lose value at the same rate and thus it is definitely a hedge.
1.
>in sum, hedge funds are called hedge funds because they use a full array of hedging techniques to reduce portfolio volatility.
https://www.imf.org/external/pubs/ft/fandd/2006/06/basics.ht....
If you invest in smaller markets, sure. But not eg the S&P500. The sums already involved there are orders of magnitude bigger.
In any case, you are right that you would want to be careful about moving a billion dollars into S&P500 all at once. But that doesn't mean you shouldn't invest in an index ETF.
So there's a difference in how much your position affects the overall market, and how much getting in and out of the position quickly would affect the overall market.
You can have a look at the daily volumes of the relevant ETF to get an estimate. SPY seems to have a daily volume of dozens of billions of dollar traded. So a single billion over a day might not actually make that much of a difference.
Btw, if you just give the market enough credible warning, you can just route the order via an exchange. People will prepare positions and jostle to be your counterpart.
You certainly can, this is just where you start moving the market. If your broker has to make a call for you, the price to fill your orders is dropping fast.
Investments: no-load index mutual funds/etfs (1) total US stock market index (2) total US bond market index (3) total world stock market index, excluding US
Prime resource: Bogleheads.org – Investing advice inspired by John Bogle (1) www.bogleheads.org (2) www.bogleheads.org/wiki/Main_Page
All of those affect what you should do and what is optimal.
https://www.bogleheads.org/wiki/Individual_bonds_vs_a_bond_f...
Reasons for a fund may include ease of management, variations in contributions and times, uncertainty of when the need, and ease of rebalancing.
Individual bonds may be more appropriate for a defined liability at a specific time, for a bond ladder, or as a tax minimization strategy.
Can you also explain why a hedge fund portfolio would increase your portfolio’s Sharpe ratio? Already with the returns in the article it’s less than S&P500 so it’s likely somewhere below the CML as the efficient frontier.
That nit picked, the addition of any source of return greater than the risk-free rate, if uncorrelated to the rest of the portfolio, will improve Sharpe. If the return is small, then the optimal allocation is small as well, but still nonzero.
In CML terms, the existence of hedge funds as uncorrelated strategies changes the shape of the CML curve.
Do they really offer diversification and are they really uncorrelated? See http://universa.net/Universa_Spitznagel_SafeHaven_HedgeFunds...
I particularly like this quote as a summary:
> Hedge funds would appear to have lost whatever ability they may have once had to provide risk mitigation value (which, let’s face it, wasn’t very much). Hedge funds just don’t effectively hedge anything; worse yet, perhaps they have even lost sight of that very objective in the first place. They are without a purpose.
https://www.macrotrends.net/2324/sp-500-historical-chart-dat...
i.e. to compute the percent of starting years for which 10 years of holding the S&P 500 would underperform 36.3% (the average of the 5 hedge fund-of-funds)?
Tangentially, over the course of an individual investor's working years, I think this shows that the S&P 500 is pretty good, if paired with appropriate bond allocation as your move towards retirement.
> most buyers and sellers know that they have the same information as one another, what made one person buy and the other sell?
> the evidence from more than 50 years of research is conclusive: for a large majority of fund managers, the selection of stocks is more like rolling dice than like playing poker.
> the year-to-year correlation among the outcomes of mutual funds is very small, barely different from zero. The funds that were successful in any given year were mostly lucky; they had a good roll of the dice. There is general agreement among researchers that this is true for nearly all stock pickers, whether they know it or not — and most do not
I live 15 miles west of Wall Street in a suburb called Montclair, NJ. There’s a neighbor of fancy mansions locally known as “hedgefund manager row”.
It ain’t called “hedgefund investor row” for a reason!
Also, most hedge funds have either a "pass through costs /performance fees", or "management/performance fees" (generally at 2/20%). Meaning they earn money on the absolute returns they make for their clients.
But if you want to believe that the world is dumb and hedge fund managers earn money through clueless clients, sure. You might also want to checkout the arguments of flat earthers, it's in the same vein.
So it's not really a way to compound a large (Buffett-sized) fortune. He handily beats almost everyone for total amount of dollars gained per year, if not percentage-wise.
It makes me wonder, why are rich people still investing in hedge funds? how are they still getting clients given all the data saying that most index fund outperform hedge funds?
There are reasons to not invest in index funds (why does anyone invest in bonds?) that have to do with the purpose of the investment not being to maximize return.
That said I think there's still a lot of ignorance and gambling going on, which is why the zombie index has yet to rise from the grave.
This is also why a lot of investment advice from time immemorial includes diversifying from stocks to bonds and other, more stable instruments as you age (e.g. commodities, real estate, etc.).
There's also other things about having a stable volume of trade being good, e.g. reduce the likelihood you are affected by runs, e.g. SVB in 2022, or oil prices in the height of COVID19 panics and supply shocks.
Chasing an extra 2-3% in gains in return for exposing yourself to more draw down risk starts feeling very different when you have $200mm in liquid cash and even a modest +5% a year is $10mm.
On the other hand, sometimes you want above-average returns and are willing to pay the fee to potentially nab it.
Then one sentence into the article they start trying to shill dodgy commercial real estate investment strategies. Can we just take a moment to consider the balls you have to have to insert that suggestion into this article about what Buffett is saying. I'm fairly sure the message Buffett was trying to push wasn't "Hedge funds are bad you should go and put your money into highly suspicious alternative investment schemes".
https://www.ft.com/__origami/service/image/v2/images/raw/ftc...
https://www.investopedia.com/articles/03/121003.asp
Buffet didn't get "really lucky." The likelihood of a hedge fund beating the S&P 500 over a 10 year period is quite low. He would've been really unlucky to lose that bet.