Most hedge funds don't appear to be doing any hedging or active management

http://www.vox.com/2015/8/19/9177679/hedge-fund-tupitsyn-lajbcygier

by jseliger • 11 years ago

28 18 11 years ago

I'm not so sure about how the article ends. According to the traditional "more risk, more reward" idea, it shouldn't at all be surprising that taking active steps to reduce your portfolio's volatility results in lower average gains.

If those non-linear hedge funds are really succeeding in reducing their customers' risk exposure while also reducing their performance by only 10 basis points, color me impressed. That's over an order of magnitude better than the hit I'm taking from the asset allocation strategy I use to limit risk on my short time horizon stuff.

et2o3• 11 years ago

It depends if the hedge funds really are reducing customers' risk exposure. If the companies the hedge funds own are basically the same as the market (the article references Google, Apple, and Facebook as the most commonly owned stocks), then they probably are not.

et2o3• 11 years ago

If the benefits of passive investment strategies are so obvious and widely known, why do wealthy investors turn to hedge funds? I find the argument that they just don't know better to be unsatisfactory.

help_everyone2• 11 years ago

Sales.

et2o3• 11 years ago

You mean they are simply being sold to so well they don't conduct their own research? That also seems like an unsatisfactory explanation.

rockinghigh• 11 years ago

High net worth clients only allocate a small percentage of their portfolio (5-20%) to hedge funds with high fees. The rest is invested in mutual funds and ETFs with low fees (<1%).

bko• 11 years ago

My impression is that they want to invest in these exclusive vehicles precisely because they're exclusive.

Also, these are human beings not homo-economicus or even necessarily financially savvy people. Very successful people also tend to have over-confidence. Sure, most hedge-funds under-perform the market, but some perform very well, and I know how to pick those.

chollida1• 11 years ago

Hedge funds have had a rough time of late. Too many funds chasing too little money. I'm not surprised that many of them aren't doing well. This is already starting to shake out as the sell side has gotten out of the fund business.

Having said that

Think of how a recent, less technical study showed that Apple, Facebook, and Google are three of the most widely held hedge fund investments.

Umm not sure why that would be a knock on hedge funds. Wouldn't you expect them to hold some of the most high performing stocks over the past few years?

I mean, isn't that pretty much the exact premise of a stock picking hedge fund? They pick the market winners so you don't have to hold the entire market, losers included?

There are lots of reasons to hate on hedge funds but that point shows the blogger really had their premise determined before even starting to analyze the paper and data.

Remember, the premise for many hedge funds is that they hedge the down side, in 2008 funds outperformed the market.

http://www.vox.com/2015/2/24/8093957/hedge-fund-racket-chart

Hedge fund returns in aggregate are also driven down by the large number of funds that are started up and fail within the first 3 years, I've seen stats with 3 year close down as high as 80%.

Judging hedge funds by aggregate would be like someone looking at the startup market and saying, "Hey 80% of companies fail within the first 5 years, why would anyone invest or work for a startup when they have such awful failure rates."

The truth ends up being the same for both startups and hedge funds, most fail fast and only lose the owners money, with a smaller amount failing in 2 years with angle funding, and an even smaller amount failing in 3 years with outside investor money.

nichodges• 11 years ago

So many publishers still have such a long way to go in working out how to do native content well.

While the study is interesting, I reckon that piece took Matt Yglesias (an otherwise great writer) all of about 10 minutes to write. And the token "make sure to save enough, own stocks for the long term, and stick to passive strategies rather than trying to beat the market." is just awkward.

joshuaheard• 11 years ago

It's been known for a while that index funds usually do better than managed funds (including hedge funds). So, this isn't really news (though I don't consider Vox to be a news source anyway). Traditionally, hedge funds were contra funds used to hedge against market decline. So, in that sense, in a rising market such as this, a hedge fund should be performing more poorly.

However, modernly, the term "hedge fund" includes any sort of privately managed liquid asset fund. I don't know why they perform worse, probably due to increased risk taken to increase returns over the competition.

1971genocide2• 11 years ago

There seems to be a global massive increase in liquidity being injected in indexed and EFT funds.

My knowledge in finance is zero. But hearing about how indexed funds and EFT funds works it seems to work in reserve to sub-prime mortgages.

Rather and slice debt into hundreds of pieces and and selling it to investors you seems to slice saving into hundreds of pieces and selling it to people who need liquidity.

Could someone with more knowledge tell me why I am completely wrong ? I really do not want to witness another market crash.

zzalpha• 11 years ago

Err... An index fund is no different than an actively managed fund save that instead of trying to actively rebalance the fund they just buy a basket of stocks or what have you to try and model some index.

That fund is just transacting in stocks, bonds, or other assets. The liquidity they might provide is to the broader market by buying and selling assets like any other investor, just doing it with the pool of money provided by fund participants.

If you have a problem with that you should be concerned by any fund, actively or passively managed, including mutual funds, hedge funds, etc, as they all operate on the same basic principles.

lordnacho• 11 years ago

The funds these researchers are likely to have found will tend to be the big ones. Incentives when you have a few billion dollars under management are not what you think.

Your main issue once you reach that size is not losing the institutional investors. These tend to be pension fund type folks who have stringent due diligence requirements: lots of boxes that need to be ticked. This ends up meaning they actually don't have that many funds they can invest in, because inevitably all the filters will reduce the field. So what does that mean? It means generally they aren't going to change managers. The only thing that will really make them change is a blowup. The kind of thing where they have egg on their faces because they found this guy Madoff, did their homework, and it turned out to be a fraud. Or a big explosion that isn't a fraud, but wasn't what it said on the tin. That's the only time they'll ever change once they've gone through the pile of docs. (Oh, there's also when there's a new guy in the seat and he needs to do something. But that nets out.)

So what do you do as a manager? Just make sure you don't blow up. (I presume if you're running a fraud you have some strategy, too. But I'm not experienced with that!) How do you not blow up? Well, there's blowing up and there's blowing up with everyone else. Because as I mentioned, there's a limited portfolio of managers available. So just don't veer to far away from the pack, and you'll be mostly fine.

I would think by far most managers do not have systematic alpha. Either they aren't systematic, ie they trade discretionary and their pitch is to be good forecasters, or their system isn't doing anything other than well known tradeoffs (buy lower P/Es, higher cash flows, sector rotation, etc). Or they have a different risk taking mentality that makes them look better when times are good (skew trades).

There are a number of strategies out there that are real alpha though. Tough to find them, but let me give you an example. A friend explained he'd found a systematic way in which traded funds are mispriced. So, due to the intricacies of a little corner of the market, there was some predictability in how certain baskets are mispriced against their contents. He set up an infrastructure to exploit this (not HFT, paperwork), and makes a good living just doing that arb. There's load of similar little pockets to make money in.

Most hedge funds don't appear to be doing any hedging or active management

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