
Buffett pulls ahead in wager against hedge funds - mshafrir
http://finance.fortune.cnn.com/2013/01/24/buffett-hedge-fund-bet/
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wpietri
Hey! They didn't even mention Long Bets! That's the site that registered the
bet and is holding the money.

<http://longbets.org/>

Which I am going to pimp shamelessly here, as I wrote the code for it a decade
ago. We have bets that go out many years. There's one that won't be decided
until 2150. There's even one about how the universe will end.

If you would like to make a similar long-term bet, either use the site or let
me know; I'm glad to facilitate. As long as the bet is more than 2 years out
and the stakes are more than $200 each, you're golden.

We'd love to see the site used more to call out people making bold/crazy
predictions. E.g., is somebody saying that NoSQL databases will rule the earth
in 10 years? Do you think they're wrong? Tell them to put up or shut up! We'll
put you both on record.

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gwern
One problem you guys have is that you aren't updating anything. I've been
copying over predictions to predictionbook.com for the last 2 or 3 years now,
and a number of predictions have expired - with no official judgment or
anything.

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wpietri
Thanks for the feedback!

The predictions intentionally haven't been updated. With bets the adversarial
bet definition process produced clear, ajudicatable criteria. Predictions,
though, were intended to be looser. We just wanted to record them, and didn't
want to be in charge of deciding them.

If I had it to do over again, I'd be tempted to solve the problem in a
crowdsourced way, where people get to opine on the outcome of the prediction
endlessly.

I'll check out PredictionBook; it looks interesting. And if you want to
discuss this stuff with me or the Long Now staff, feel free to get in touch.

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travisp
This shouldn't be too big of a surprise. Most academic research about hedge
funds show that the majority of them don't outperform the market. When they
do, it appears to be because of greater exposure to particular risk factors
rather than manager skill (in investing, greater risk usually means greater
potential for reward). When you consider the extra costs of investing in a
hedge fund over investing in the market, most hedge fund investors are getting
a bad deal -- they are paying more, but getting market returns.

One source that looked at 12,980 hedge funds with $1.8 trillion in management:
[http://faculty.baruch.cuny.edu/tbali/BaliBrownCaglayanJFE201...](http://faculty.baruch.cuny.edu/tbali/BaliBrownCaglayanJFE2010.pdf)

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wtvanhest
Its possible that I am reading the paper incorrectly, but the conclusion
clearly states that manager selection of Beta accounts for a large majority of
over or under performance. Nowhere in the paper does it suggest that they do
or do not under perform the market.

To anyone who is familiar with how money management works, the conclusion in
the paper is obvious. Exposure to beta will increase returns in good periods
and decrease returns in bad periods.

The research looking at "average hedge fund performance" is also misleading
because while the analysis is technically correct, the conclusions in those
papers are obvious as well. If you hedge out most of the beta, you will get
zero return on average. Once you subtract expenses, you will by default
perform negatively the market. (in reality, hedge funds do not hedge all beta
to zero, they hedge it pretty close to 1 so they track the market, but they
_probably_ under track it. This also leads to negative alpha)

Where hedge funds play a role in investment management is when individuals can
select hedge fund managers they believe will outperform. Professional
investors, including fund of funds believe they can do this, and some will do
this, some won't and the total will net to less than zero.

[[Added in response to additional point below]]

The paper cited is using an econometrics model which is using factor analysis
to determine where the "biggest" source of performance comes from.

Because beta is a factor, it will overshadow alpha automatically if beta is
large enough. Alpha between funds will be destroyed in the model so the model
will output zero alpha with enough funds. While beta will be persistent since
by definition beta is a performance magnifier (for lack of a better term.)

In other words, the conclusion in the paper is obvious, and not worthy of
discussion.

[[Added in response to Jesse]]

Yes, if you are aggregate all money invested in hedge funds the average return
will be lower than the benchmark that Beta is based off of. ETFs may or may
not beat the benchmark depending on the ETF. Some have tracking error which
causes them to not beat benchmarks.

Also, you may notice that I am not arguing whether the OP is correct, I am
generally agreeing with them, but the point is that his assertion is obvious
and the cited paper is obvious and provides no real value.

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travisp
Yes it's beta and yes it's what's expected, but the hedge fund industry has
historically claimed that returns are coming from alpha (investor skill)
rather than beta (riskiness). There's the claim now that they are picking the
right kind of beta to attempt to justify what papers are finding, but the
outperformance that is exhibited by some hedge fund managers doesn't usually
persist, suggesting that their selection of the particular risks were not a
result of their skill.

If the returns are actually from "dumb" beta, then the hedge fund fees are not
appropriate for what you're getting. You're getting market returns appropriate
for the amount of risk that's being taken, rather than outperforming, and then
losing most of that to fees. Yes, exposure to beta can be a smart choice, but
it can be done without excessive fees.

>Where hedge funds play a role in investment management is when individuals
can select hedge fund managers they believe will outperform

Yes, this is the common refrain in mutual funds too: Buy the top performing
managers, not the average fund. But the research shows that hedge funds that
outpeform do not persist in outperforming. This suggests that the managers are
not being particularly skilled in their selection of risk. Most fund of funds
do not perform significantly better either -- there's little evidence that
hedge funds are providing investors real value. Hedge funds are a status
symbol for the wealthy, not a smart investment.

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outside1234
This is not a surprise. Academic research has shown that 80% of funds
underperform index funds and do even worse when you factor in costs.

Its not sexy to say "take all your retirement money and put it into three
funds: international stocks (eg. VEA), domestic stocks (eg. VTI), and domestic
bonds (eg. AGG)" and rebalance it once a year to ratio based on your age but
the research shows this is the most effective method of investing because it
takes the emotion and costs out of it.

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rogerbinns
Vanguard even have target retirement funds (eg Target Retirement 2035 if you
expect to retire around 2035). They automatically do the rebalancing for you -
all you have to do is contribute while working and that is it!

[https://personal.vanguard.com/us/funds/vanguard/TargetRetire...](https://personal.vanguard.com/us/funds/vanguard/TargetRetirementList)

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fduran
The advice I got regarding stock market from a pro was to invest long term in
the 3 indexes: "spiders" (S&P 500), "cubes" (Nasdaq 100) and "diamonds" (Dow
Jones Industrial Average), seems solid, outperforming funds and without
management fees.

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artsrc
If the market is efficient, then the correct investment is market weighted.

You are missing the rest of the world and smaller stocks. This implies that
you are missing some diversification that would reduce your risk.

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saryant
That's why I follow the basic three-fund portfolio advocated by contemporaries
of John Bogle, founder of Vanguard: VTSMX, total US stock market, VTIAX, total
international stock market and VBTLX, total bond market index.

Three basic index funds each with very, very low fees compared to actively-
managed funds. I'm at 60/30/10% respectively in those funds.

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Evbn
Or roll them into an auto adjusting target retirement 20XX fund

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saryant
I would if my 401k included one that wasn't terrible. I do use one of those
funds for my Roth IRA though, I just wanted to limit my post to the principle,
not the implementation.

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jhowell
I think that it comes down to people. To become a C level executive or board
member at a S&P company, presumably you've undergone a reasonably level of
public scrutiny and shown the courage that Ben Horowitz sometimes references
when talking about start up leadership, it takes to make the right and
difficult decisions that benefit the business. Not every board member or
executive, but the majority.

The companies in the fund of funds, presumably don't have the same "blue chip"
ratings of the S&P companies and their management may still be undergoing
their personal tests of courage.

In the end, in the absence of a extremely hot market - which could be a good
or bad thing given the experience level of senior leadership, it's probably a
better bet to go with the tried and true.

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xntrk
Fund of funds get hit pretty hard by fees since each fund takes out there fee
and then the fund of funds also takes out it's fee.

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hkmurakami
IIRC the hedge funds take the usual 2 and 20 (though Renaissance Technologies
apparently takes 5 and 36 now), then fund of funds takes 1 and 10 on top of
that.

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rsobers
Since hedge funds are subject to bigger swings, I suppose Buffet could be
ahead for the next 5 years and then lose out due to a big upswing, no?

