
Most hedge funds don't appear to be doing any hedging or active management - jseliger
http://www.vox.com/2015/8/19/9177679/hedge-fund-tupitsyn-lajbcygier
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chollida1
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](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.

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et2o
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.

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help_everyone
Sales.

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et2o
You mean they are simply being sold to so well they don't conduct their own
research? That also seems like an unsatisfactory explanation.

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1971genocide
Its hard for me be believe that people with a lot of money whose only job in
life is to figure out how not to lose it do not do their research. There has
to be deeper reason.

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derriz
I've pondered this too.

I have a friend who is a successful business person and know some others -
none in the finance industry.

These are just observations from a tiny sample size. First I am surprised that
none understand the finance industry; understandable since they were too buzy
building a business to worry about anything but cashflow. More importantly is
that I think they all suffer from a cogitative bias - they all ignore
survivorship bias and believe they can beat the "system" which makes them
susceptible to slick finance sales pitches. That sounds a bit cruel - i don't
mean it to be; the same attitude got them to where they are.

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bunderbunder
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.

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et2o
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.

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lordnacho
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.

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joshuaheard
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.

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1971genocide
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.

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zzalpha
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.

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nichodges
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.

