
I'm bullish on hedge funds - gearhart
http://krzana.com/blog/im-bullish-on-hedge-funds
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seibelj
My understanding of a hedge fund is simply an organization that is given the
freedom to make any type of investment using any type of strategy they
want[0]. They raise millions, and for a set period of time the people who gave
them the millions cannot pull it out, allowing them to execute strategies that
may not make any money for several years, which is different from a
traditional investment organization.

So all the author is saying is that giving a "black box" a lot of money, and
letting it opaquely invest however it wants, will be a winning investment
strategy in the future, even though right now it isn't working out so well.

[0] Of course they have documents that explain the strategy, agree to certain
things, etc. I'm simplifying it a bit.

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eloff
> So all the author is saying is that giving a "black box" a lot of money, and
> letting it opaquely invest however it wants, will be a winning investment
> strategy in the future, even though right now it isn't working out so well.

That's the best description of a hedge fund that I've heard. Likewise, I don't
see how that will ever be a winning investment strategy. You'd be better off
with just an index ETF.

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JamesLeonis
"Winning" is the wrong mode of thought. It's risk/reward. Index funds are low
risk low reward, by design. Hedge funds are high risk high reward.

Put another way, Startups are just narrowly defined hedge funds. You can be
adverse in investing in a risky startup and still be bullish about startups in
general.

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jazzyk
Except that the "high reward" part has been missing in the past several years.
Hedge funds have been mostly under-performing (compared to the overall
market).

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unknown_apostle
I’m bullish on any investor who:

* stays away from the pressure to be "with it" every quarter

* stays away from stuff that everyone is talking about

* stays away from short term thinking (like real time datasets)

* stays away from statistical artefacts and spurious relations (aka “huge amounts of data”)

* stays away from stuff where they don't understand the basic business models

* stays away from stuff that is built on promises

* stays away from mostly all hedging, other than paying the proverbial 50c for a dollar

* stays away from diversification "just because" (looks at each individual investment on its own merits)

* stays away from arbitrary limitations on asset types or sectors

* stays away from short selling (or situations where you can loose more than what you put in)

* stays away from giving or taking tips on individual investments

* even stays away from feeling they have to kick ass every quarter (if you just can't find anything good... do nothing)

* instead just focuses on not loosing big quantities of his/her own money

* tries to keep costs down (less data, less trading, no hedging, low fees, less dealing with currency exchange)

* doesn't worry about volatility or even enjoys it

* has a few large winners and then some smaller potential winners

That may exclude most if not all funds, hedged or otherwise.

Also: in my experience every 19 year old and his dog now tend to consider
themselves "macro traders". It’s an indication of how extremely financialized
the entire world has become since the 80s. That in itself bodes ill for the 2
and 20 crowd.

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ianleeclark
So you're bearish on _any_ investor.

~~~
blowski
I suspect those filters produce the same quality as grabbing names from a hat,
since they are a list of popular but vague aphorisms. Judging each and every
investment on its own merits is the only way to succeed.

~~~
unknown_apostle
> Judging each and every investment on its own merits is the only way to
> succeed.

True. And yet the world of investing (I'm not talking about market makers etc)
is filled with funds whose composition is determined by everything except
simply buying predictable cash flows for cheap, wherever you can find them.

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jomamaxx
Sadly, most of the history of hedge funds it would seem relates to winning in
'zero sum games'.

i.e. a waste of human potential.

Obviously there are side benefits: market liquidity, rational pricing, 'market
making' for specific activities, the ability to allocate resources in more
exotic ways etc. but by enlarge it doesn't look good.

It'd be nice to see more opportunity in growing the pie rather than fighting
for the same pieces.

~~~
gearhart
We talk about it a lot in the office and I definitely agree with you. Perhaps
I'm naive, but I don't think it needs to be the case though. I sort of touched
on it at the end of this [1] but it's something I want to dig deeper into.

We really feel there's a lot of power to use the profit making incentive that
drives these firms to generate real-world value, and that the main driver of
that has to be tying trading decisions more closely to true human value by
giving the industry better real-world information (and potentially sensible
regulation).

Hopefully, we can help in some small way, but I think we still need to do a
lot of work to understand the incentive mechanisms of the industry better.

If you want to subscribe I'll leave a note and let you know particularly when
something on that topic comes up.

[1] [http://www.krzana.com/blog/the-future-of-financial-
analysis](http://www.krzana.com/blog/the-future-of-financial-analysis)

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crdoconnor
This guy sells products to hedge funds.

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robterrin
+1. Colloquially know as, "talking his own book."

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lordnacho
Sounds mostly like gibberish to me, sorry to say it.

> By the 90s, hedge funds were back, this time capitalising on advances in
> sheer computing power that permitted real-time pricing of instruments in
> volumes never previously possible. By introducing more and more complex
> derivatives and so increasing the difficulty of pricing the market, hedge
> funds managed to maintain this source of alpha almost until 2000.

There are very few funds who make a living pricing complex derivatives. I used
to work in a couple of funds that traded derivatives, and quite often we had
to explain to people what volatility trading was. Generally, the more complex
it is, the more the market maker will charge you in spread for trading it.

It's also not computing power that allows you to make money trading them. A
few numerical PDE solvers do not take a huge amount of computing power (or
indeed data) to calculate. The people who make money off it are the ones who
manage to sell a product to a client at a price the client doesn't understand.
I wouldn't use "complex derivatives" as speculation vehicles ("I'm
bullish/bearish -> trade") in themselves.

> Even as the market caught up and the potential for alpha withered for hedge
> funds in the early 2000s, these newly-technically-savvy funds shifted their
> focus to speed; driving in the era of the hyper-successful HFT firm that
> drew massive, riskless profits from the sheer speed at which they could
> capitalise on arbitrage opportunities.

HFT firms are not hedge funds. I'm sitting in the offices of one right this
minute, writing code for a strategy. It's not something outside people can
invest in. I wouldn't say the profits are riskless either, they're just not
traditional risks that you list in a finance course.

> The winners in this market will require many of the skills that have been
> required before - deep market understanding, strong technical competence and
> grounded, balanced leadership - but they will also require a new skill; the
> ability to acquire, make sense of and apply these new data sets.

Gibberish. You need to know what you needed to know, but also to be open to
new situations?

There's no discussion here of how various styles generate their alpha. What do
macro guys do? Surely not complex derivatives and HFT? What about special
situations? And activists?

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inthewoods
I don't know why anyone is bullish on hedge funds just based on their numbers.
Bottomline, there will always be successful hedge funds, but your chance of
identifying the winners before hand is challenging to say the least. Add their
costs and "heads I win, tails you lose" fee structure and I'm really not
interested.

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chrismealy
The point of hedge funds is that the US government will allow very rich people
to pay super high fees on poorly regulated investments.

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lintiness
hedge funds with less limiting investment "thesis" tend to massively
outperform bear markets. long s&p500 index funds (all the rage) has been a
great strategy since the last real market downturn (7 years), it won't look so
ironclad ingenius when stocks take their inevitable 2 year 30-50% dip.

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jomamaxx
'outperforms' ... over which time period?

Because over any time period, some strategies are winners, some are losers.

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YPCrumble
What hedge funds are really good at is creating a tax strategy for the rich.
Let's say you have a business and you want to pay less tax. You talk to a
hedge fund.

The hedge fund says, let's convert all your earnings that should be taxed at
the short term gains rate and convert them to long-term capital gains!

The hedge fund takes two well-correlated stocks, let's say Coke and Pepsi.
They make a hedge going long Coke and short Pepsi. The hedge doesn't make or
lose money, but you engineer the hedge so that you hold your long Coke shares
366 days (long-term). You sell your Pepsi shares after 364 days (short-term).

You haven't made any money, but you've engineered short-term capital losses
and long-term capital gains. Of course you've created your hedge such that
your short-term losses offset your business' short-term gains. Now your
profits are in the long-term Coke stock, and rather than paying a 50% marginal
tax rate, you pay 20%.

Yay hedge funds!

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HappyTypist
This doesn't actually happen. Tax avoidance is all about related party
transactions these days, and there are more efficient ways to convert ST cap
gains into LT cap gains.

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lbotos
as someone fascinated by this but outside of that world, can you elaborate?

