We've been going since 2002: https://www.wired.com/2002/05/longbets/
We are happy to host bets of long-term significance, and the minimum bet is only $200/side. I am glad to personally help shepherd people who are serious about bets to make sure you get through the process.
I would especially like to see HNers making bets about the things we argue a lot about. Bitcoin! VR! Uber! If you're tired of people posting waffle on some topic where you have a strong opinion, then challenge them to put money down.
Since prediction tracking and aggregation sites use reputation instead of money, they scale to a higher number of predictions. As proof, there have been only 747 predictions and bets on Long Bets, while gwern alone has made 2275 on PredictionBook. Furthermore, the Metaculus community prediction provides valuable forecast information, much like prediction markets, while predictions on Long Bets don't count as Bayesian evidence of their own.
The Long Now's mission is to foster long-term thinking broadly. We don't care as much how well-calibrated a particular individual is. The point of Long Bets is to generate discussion, argumentation, and consideration. That's part of why we require each bettor to make a case for their side: we're less interested in who was right or wrong than how and why someone was right or wrong.
I hope that people also use those sites. But I would love to generate some clear, dramatic bets about controversial topics here. The Buffett bet is a great example. People every day are putting money into one investment or another and have been for a long time, and there's no lack of data on results. But because of this bet a great number of people have thought about these specifics, as well as the many interesting related issues. I'd love to see that around more topics.
Why is registration temporarily disabled? Can I get an email notification when it's back up?
But if anybody has a bet they'd like to get registered, just email me and/or them.
The best way to contact me is via email; try my first name at this domain.
Dan @ Long Now
But luckily they used 5 digits. 5 digits should be enough for anyone.
Payout are to the bettor's selected charity. Or, if that's gone, the closest one we can find.
The tricky part is coming up with a clear agreement about what "cure" and "death" mean here. But there's a lot of good discussion around e.g., the extropians, so I think a solid bet could be created.
Or do you mean for your own? This is between you and the person you bet with. If you have a firm opinion, definitely find somebody on the opposite side and see if you can put together a bet.
We take the money up front and deposit it in a long-term investment account. Each bettor picks a charity, and the initial bet plus half the gains go to the winner's selected charity. (The charity thing is to get around US gambling laws.) If if that charity doesn't exist anymore (which is plausible given our longest current bet settles in 2150) then we pick a charity that's close in spirit.
A minimal-fee S&P 500 index fund, I hope. I think Buffett just proved that anything else would be fiscally irresponsible.
My personal experience with hedge fund managers is that they are good salesmen that peddle their financial expertise to clients, convincing them of their financial rock-star status (usually gained through a lucky investment or two). Paulson is a classic example. Wealthy individuals buy into it, especially those that are less educated (e.g. those that have inherited money), and happily allocate away their money to these guys. Once the funds grow to a certain size, then they might consider pitching their investments to pension funds, and their money pot grows, as does the nominal value of their fees. By the time they have pension funds on board, their investments get less and less risky, eventually looking more and more like a basket of standard commodities or a standard equity index! Thus, the value they add also becomes smaller and smaller.
In my opinion, the hedge fund industry is a bit of a farce, but there are a small number of firms that do have a secret sauce that works sometimes (rarely forever though). In my experience, the firms that tend to make consistent money are the market makers, rather than the speculators.
1. Virtually all profitable strategies run by hedge funds are inaccessible to small time investors nearly by definition, because they have more capital and lower capacity constraints,
2. The partnership you're talking about with Deutsche Bank doesn't account for most of their returns, and was only in effect in the last decade, not decades before.
This is why you need to make predictions of performance ahead of time instead of analyzing past performance.
PS: A standard trick is to start 20 funds and the 'best' one has high returns. Create another 20 funds to have a new 'best' when the old one reverts to the mean. Thus you need to analyze total returns weighted by funds size of a company not just individual funds.
The truth is risk is hard to measure accurately and most Alpha is simply risk hidden from their investors.
Which is why a statistically significant Alpha takes more than a single funds past performance. And how someone just lost a 1 Million dollar bet on this crap.
"Survivorship bias" is a meme that is commonly thrown out, but to date no one I've challenged on it has empirically demonstrated that this accounts for the emergence of ultra-successful funds. Model this out a bit - what is your single unit of trading to judge and what is your time interval? How many other participants are there in the same interval, and how is each unit judged? You can't just judge on an annual basis - no firm has an actual 50% chance of beating the market each year. Funds like Renaissance make hundreds to thousands of trades each day. Moreover, different firms have different chances of beating the market each year.
Basically, I want you to rigorously formalize how a firm like Renaissance maps to monkeys throwing darts at the wall, because as much as people like to use these analogies (coin flipping, etc), they're never empirical. How do you account for a firm that beats the market by an overwhelming margin for 2 - 3 decades and never having a return poorer than the market (and in fact only rarely being down per quarter or month).
EDIT: Elsewhere: https://news.ycombinator.com/item?id=13797635
Feel free to list the years they had over 70% returns vs less than 70% returns.
Further, they stopped publishing returns suggesting an even lower long term average.
So, you are looking at a biased subset of a funds returns not total returns which greatly shifts the probability's.
This means that if you want to continually beat the market, using any strategy beyond an impressive gut, you need to be continually developing new tricks and strategies, finding new market mispricings to exploit as your old ones dry up. It's like juggling: someone who is skilled or lucky can keep the balls in the air for quite a bit of time, but eventually you're going to run out of tricks, and the best you can hope for when that happens is returning to average returns.
Howw many sigmas divergent is it?
The comments you see on forums like this one are just best guesses - educated guesses, but generally underinformed and relatively out of date. I personally consider it a fluke that RenTec is as famous as it is - other comparable firms like TGS have far less notoriety (and are probably better off for it).
It shouldn't. That anyone would take a basket of hedge funds and think it would win vs the market is madness. Active investment is negative sum due to fees - it's essentially implausible for hedge funds on average to generate alpha.
There are plenty which do. There are lots which actually simply provide alternative Betas, or smart betas, or whatever. Some of them have genuinely reasonable fee structures! Finding those funds and even getting access to give them your money is really problematic (and often results in another layer of fees to "access providers").
Only if they're playing fair. But, wink wink, you should really wink wink invest in my uncle's fund, he knows a wink good strategy, but if you enjoy plausible deniability you'll just fork over the dough without asking too many questions.
This is a reason why a lot of money is flowing into quant funds despite the overall outflow, because most quant strategies do great in volatile markets (but mediocre otherwise) where other funds are the market+fees.
Market makers perform a similar function on illiquid stocks, where there may be more sellers than buyers at one moment but more buyers Jan sellers the next.
Speculators are simpler. They're the guy who buys Telsa roadsters because he thinks they will be a collectible soon.
IE, a market maker would have a standing order to buy 1000 shares of microsoft stock for 29.99$ and then have a second standing order to sell it for 30.00$ at the same time. If the market is on average buying and selling randomly, the market maker makes .01$ for every pair of buy and sell trade.
A speculator is someone who takes only 1 side of the market. IE, they buy 1000 microsoft shares, hoping that the price will increase, or sells 1000 shares hoping that the price will decrease.
To be clear: I have mined and sold data to hedge funds before, including well known ones, and from that work I derived two conclusions:
1. It is fundamentally possible to beat the market consistently and legally by exploiting information asymmetry, and
2. Most hedge funds, especially the most successful ones, do not operate via illegal insider information (and will, in fact, fly into a compliance department initiated lock down on a security if, say, an overzealous data vendor compromises confidentiality).
Basically, I'm asking for clarification because as stated, I disagree with your assertion here. There are legal grey areas and some people are outright criminal, but overall I wouldn't characterize the top performing funds as being wholly or even close to partially dependent upon insider information, let alone at a systemic organizational level.
Are you able to tell more about what types of data this was? I'd be interested in hearing more. I love the story of hedge funds using satellite imagery of parking lots to predict retail store strength
I mined data in the real estate, QSR, automotive and airline sectors (and a few peripherally related ones). We would identify a source of data that was a demonstrably strong proxy for a specific company's revenue (that is to say, if we broke out a naive timeseries of the data it would map nearly 1:1 to earnings results each quarter). Then we would collect this data en masse, writing software over a custom crawler and infrastructure, bespoke to each case. During ingestion we'd process and normalize the data and dump it in a database. Once we had a significant amount of data we'd build a forecasting model, which could be very straightforward ("how many products have they sold this quarter", for simpler companies) to very complex ("can we reverse engineer the amount of business which is now online" or "can we determine the undisclosed amount of business being done in this specific region"). This analysis (and not the data itself) constituted the product - we never even provided the data directly to the hedge funds.
Once the crawling and analysis was mature, we'd incubate it for a few quarters while building interest; then, after showing a very strong mapping over several quarters, offer it as a data product. It was not uncommon to achieve <5% or even <1% margin of error for forecasting earnings announcements on a quarterly basis.
The data was always public and legal, though challenging to identify and difficult to effectively crawl. It was typically derived from very uncommon sources, and would range in complexity from the extremely simple ("we can crawl sequentially incremented integers from this third party that appear to map to products sold by this company") to the very sophisticated and complex (e.g. "we've collected a zero sum distribution of ad partners and their spend on the network, are more partners churning off, and is this a better or worse outcome for the company?"). I've spoken about this in comments here before.
This is still very doable, and I still do this sort of work for personal research (and profit). However, the work I do is now much more quantitative - I'm currently taking a similar approach for baskets of equities with the goal of forecasting macroeconomic trends (e.g. subprime auto loans) instead of the earnings results of individual equities. To give a very specific throwaway example (because it doesn't violate an NDA and it no longer works): it used to be possible to pretty accurately forecast large tech retailers' product sales each quarter (like Apple) by reverse engineering FedEx and UPS tracking numbers.
I once briefly chatted with a man who ran a company that used satellite imagery to predict crop yields. I found it amusing how rather than providing this information to farmers ("It looks like you're going to produce only 60% of what you did last year, time to cut some expenses!"), there was so much more money in providing this information to hedge funds and trading firms. Morality aside, the potential for technology like this is exciting.
It's kind of cool how the combination of big data, scraping, statistics, etc. allows this small niche of analytics to thrive. I have a decent background in most of these subjects, and this seems like a very freelance-able job, so I'd love to dabble in this area and learn how it works.
It is context dependent, but I can give a basic idea. In the example you've given, high four figures per customer per quarter, assuming you just give them a deliverable report once a month and the data is turnkey enough that many customers (30 - 40) can "subscribe" to it. For a fund that wants something more boutique, like exclusivity or a specific company, five figures becomes the floor.
The nature of the business is significant upfront work (setup of data collection and analysis model) followed by infrequent tweaks going forward. Lucrative data on a single hot company could be sold for mid - high six figures per year with very high profit margin for as long as the data is available and the analysis model is both functional and interesting (i.e. delivers an insight not already priced into the market).
I'm also curious as to the level of "polish" that you are expected to provide. Let's say you know how many widgets Acme sold this last quarter. Is that by itself enough information, or would you need to calculate projected expenses / other stuff to actually be able to deliver an earnings estimate? What if you just had projected revenue?
That's great. Were tracking numbers vendor-specific in some way? So you could, let's say, order an iPhone once a week and get an idea for how many iPhones (or total Apple products) were sold in that time period, just by using the tracking numbers? Was it dependent on geography in some way?
What changed BTW? Did the format of tracking numbers change?
Just two per carrier would do: one at the start of the quarter, and one at the end. Earnings dates happen weeks after the quarter ends, so you'd have heaps of time to peddle your analysis around.
1) they can't buy in to using valuation as their sole investment criteria. They want to be "smarter", thinking they can see things others can't using psychology or charts or other pseudo sciences.
2) They fall sway to Mr Market ( read the Ben graham parable).
3) They can't sell value to clients and only want a strategy clients will pay for.
4) Buffett spends a great deal of time trying to make decisions free of bias. A CFA program teaches you nothing about this, but it's critical to good valuation work. For example, WEB does not want to know the stock price of a company he's analyzing until he's made his valuation estimate. He doesn't want to be biased into giving a too high valuation to a company he loves just to ensure he can buy it.
Lastly, there is a meta level to value investing. A great valuation at a current price isn't enough if the company lacks a competitive moat, or management can't be trusted to treat shareholders well. First level cigar butt value investors never learn this.
Its not an informational asymmetry, it's what you do with it. Walter Schloss is another great example. Beat the market by 5% a year for over 40 years, did it buying exclusively the doggiest public companies. He was the ultimate cigar butt hunter. His advantage wasn't information Wall Street didn't have, it was his willingness to use information Wall Street wouldn't, to invest in opportunities they would not.
Buffett does have one informational edge, his experience and judgement. He knows how value works, he has total confidence it works, and he never panics, even when down 50% in 2008. He never leverages himself in a dangerous manner, never gives someone else control over his decisions.
Or perhaps you worked at Reuters or similar, in which case you would not have much visibility into the funds.
So are your two sentences related in any way?
Also, it's not like actual illegal behavior is uncommon when it's hard to prove, and it's not like a lot of people aren't proud of it. Watch Jim Cramer's interview with Jon Stewart as an example and the reaction to Wolf of Wall Street as another.
In business school, a friend asked me to recommend firms where he could do some quiet insider trading by tipping off relatives who would trade on his behalf. He ended up at MF Global.
There aren't statistics on this kind of thing, but my experiences have all told me succeeding as a hedge fund requires breaking the same rules as everyone else, not unlike doping in pro sports.
Trading on non public information for a gain is going to land you in hot water with the SEC.
These two lines on the SEC site  define this.
>Corporate officers, directors, and employees who traded the corporation's securities after learning of significant, confidential corporate developments;
>Friends, business associates, family members, and other "tippees" of such officers, directors, and employees, who traded the securities after receiving such information
1. Bribery, or a monetary reward,
2. Friendship and good relations.
In both cases there must be an unbroken chain of confidentiality compromise. If you legitimately come to know non-public material information about a company and you didn't acquire this information through your own or someone else's confidentiality agreement, you're fine to use it.
Information asymmetry couldn't be functionally and profitably exploited if it was literally illegal full stop. You just have to acquire it without breaking a confidentiality duty to your own company and without aiding and abetting someone else in breaking such a duty (e.g. they tell you and you trade).
I'm surprised that anyone is surprised by my statement because it seems like an open secret. I don't think most of it is illegal, but sharing of non-public info is very, very common.
I notice this one car, weaving in and out of traffic in these two lanes, trying desperately to get ahead, constantly cutting people off. They did this for 40 miles, weaving in and out, sometimes getting ahead of me by quite a bit, sometimes falling behind.
If they had just stayed in the left lane and cruised, they would have arrived at their destination at exactly the same time.
My point is, it seems to be human nature to be bad at estimating long term averages, whether it be stock picks or just driving down the road. Checkout lanes are another example that comes to mind.
Don't cruise in the left lane.
I don’t have an especially authoritative source, and the first map I found was made seven years ago, but I don’t think things have changed much:
Only the green states would map to “don’t cruise in the left lane”; the laws in the majority only say you shouldn’t drive slower than normal traffic in the left lane.
That's being overly charitable though; self-driving cars, even with different protocols, won't suffer from the rubber-necking or phantom slowdown issues. Their algorithm designers might even be smart enough to relieve the pressure of virtual blockages by going a little faster than the speed limit on the outbound side(s) to relieve the pressure wave.
I spent weeks in highway driving bliss with pretty much everyone obeying this rule. Then when I came back, and hit CA, I was immediately pissed off at traffic -- nobody was following this rule. But at the same time, the traffic is usually so bad it makes this rule meaningless, so I think we just forget about it after a while.
But, please don't be the car that is cruising at 60mph in the left lane. It is a leading cause of accidents.
Unless you are just really unlucky XD
Speeding enforcement in the United States is fairly loose, with usually roughly a 10mph buffer. (The exception being various "speed traps", atypically mostly rural towns that rely on ticket revenue for an outsized portion of their town budget.)
I think this adds to the problem with left lane issues; even if the "true" speed limit is 80mph, if the "posted" speed limit is 70mph, some people will do no more than 70mph no matter where they are.
The reason that I said I'd like to see where it's written into statute is that I can't think of a reason why it would be legal. It sounds like driver folklore rather than law.
Having a speed limit that can be exceeded simply for overtaking (rather than by emergency services) means the practical speed limit then becomes "the limit + 5" in traffic, which increases the chance for collisions (for no reason I can think of).
I'm of course open to being shown otherwise! I couldn't find anything searching for "Texas passing speed limit" or variations, but my license is European, so I'm not sure where to look.
Please correct me if I'm wrong. Regardless, if I ever get my license, I'm pretty much always going to avoid the highway as my anxiety cannot handle those speeds.
This is impossible in a car because we are isolated from each other. To handle this we make rules for each situation that if followed would result in the most efficient use of the road.
The idea of drive right/left lane to pass is that nobody has to say "excuse me" to pass the car in front of them because that's impossible. In the same way it is not polite to stop on a busy street to "let someone in" from a parking lot or to let the car to your left at a four way stop go first. The rules are there so we can predict what anyone else will do.
In reality we all learn a different set of rules or have a different understanding of them so it all falls apart. Arguing about the specific rules doesn't make a lot of sense in reality because for any of them to work we all have to do the same thing and I don't know of anywhere that makes drivers take more than one skill test in a lifetime.
For instance, Washington state: http://app.leg.wa.gov/rcw/default.aspx?cite=46.61.100
The state police had a campaign a few years ago, stating that they were going to crack down on this. Not only did I not see any cops enforcing it, not a damned thing has changed regardless.
The mystery to me is how a geographical demographic of drivers somehow all got together and said, “fuck it, I’ll drive in whatever lane I want!” I know that’s not how it happens, but how does it happen? Taking the example of the worst drivers? Urban legend (“oh, no, it’s against the law to...”)? Some misguided attempt to stick it to The Man?
I think you have it backwards.
It's not that they're thinking "Fuck it, I'll drive in whatever lane I want!". It's that they were never told the proper thing to do, so they just have no idea that it actually matters.
Some people are actually specifically told the WRONG thing. I had a friend who was taught by his parents that if his exit isn't coming up any time soon that he should be in the left lane.
A lot of southern states are good, like North Carolina or Tennessee. Good mountain roads, reasonable drivers. And believe it or not, I’ve like riding in New York City. Don’t let the bike out of your sight lest it be stolen (I am dead serious about that unless you have some serious locking equipment). Obnoxious drivers, sure, but competent and it’s almost as if everyone knows that if we don’t cooperate at least a little, nobody’s getting home tonight. All of this of course is one giant sweeping generalization, so no one need trot out their personal list of exceptions.
But Seattle? I fucking hate driving in Seattle. It’s as if every single driver is sixteen years old on their learner’s permit with two months behind the wheel. There’s a reason one of the topics of the very first Portlandia episodes dealt with driving in the PNW.
I definitely concur that California in general is pretty great for motorcycles. With 2 jackets you can ride year round. People are well conditioned to lane splitting so they make room for even the largest of bikes. Where most people I know went down was turns in and out of strip mall parking lots. All very avoidable from the drivers side.
I ended up selling my bike a few months ago. The same commute I've done for years is just ever increasing. I've been considering going public transport for a while to regain my sanity.
The only states west of the Mississippi for which this is true are Washington, Kansas, Oklahoma, and Louisiana. 10 if you look at the entire USA. Not nearly half by population or geographic area.
At the end of the day, there is no amount of rules that will bypass the fact that there is a hard limit to how many cars can pass through any given point at a certain speed.
The outcome: as expected switching lanes gained next to nothing. But importantly the reported experience was significantly worse for those that stayed in one lane.
So switching lanes doesn't reduce commute time but the perceived commute time - and that is not insignificant!
This however isn't a poor performance because of switching a lot - these funds make money but the managers keep too much of it. The bet was on whether someone who invested in these funds would do better than the S&P - not whether the stocks in those funds did.
That being said, downvoted because the traffic analogy was very tangential to the point at hand and would only serve to derail conversation.
My layman's understanding of hedge funds is they are better at hedging losses than increasing gains. So in good years they might underperform the broader market (e.g. gain 9% instead of 12%), but in bad years they should lose much less (e.g. lose 5% instead of 15%).
I think this bet was largely a bet on the broader market dropping after a long run-up (which would theoretically favor hedge funds), but instead the market kept rising more and more.
Well the bet included the 2008 crisis. That looks like even this theory is contradicted.
Ted got the biggest market crash in last hundred years and still got trounced.
He can't admit the truth because it's destructive to his very business model.
Hedge funds as a group over time always trail the market because of their high fees. Funds of Funds layer yet another layer of fees, making this bet suicidal.
Ted Seides is a Wall Street con man grafting fees off poorly informed investors. He was delusional to make this unwinnable bet.
Obviously it wasn't worth the fees they charged. But if all those fees had been flattened down to the same expense as the Vanguard fund, would their advice have been worth anything over the index? To a first approximation, it looks like the answer is no.
To answer your question, sounds like the answer is still no, but it is worth noting that this whole conversation is ignoring the volatility side of the conversation.
Only lessens it slightly. There are plenty of bad 10-year periods you wouldn't be happy with if you were 50-55 years old with all your money in stocks, not to mention an index fund tracking the S&P500 rather than the full index.
Obviously holding index funds that are primarily stocks is the play when you are younger, but risk-adjusted returns matter a lot more for someone with big money as they approach retirement. It's worth exchanging returns for lower volatility down the line. Not that I think this bet could have turned out any other way, of course...
Hedge funds would argue that they perform better in downcycles, possibly even with negative correlation to the market.
The only thing active funds can do is invest in things that passive indexes don't, or better take advantage of the "dumb money". Things like high-frequency trading definitely count here.
Pure stock-picking though? Yeah, anyone who outperforms is on the other side of trades that underperform, so you're going to run into issues.
True, but it's not like the bet is already decided because of this mathematical fact. In theory the good pickers can predict the outperformers. It's a surprising claim that this is, essentially, not possible -- or at least only marginally possible to a degree that's cancelled out by fees.
On average, basketball teams in the NBA score X points per game. You now get to pick 5 teams and average just their scores. I'd imagine in that situation it's pretty easy to beat the league average. Again, it's a surprising and non-trivial fact that this isn't the case in the stock market, roughly speaking.
I know Berkshire isn't actually a hedge fund, but is very analogous to a giant mutual fund, albeit one that takes a very active ownership role in the companies whose shares it owns.
0:http://quotes.morningstar.com/chart/stock/chart.action?t=BRK..., look at the 10-year chart.
"Index funds will almost always outperform actively managed funds."
Convenient investment vehicles should not stop you thinking. Index ETF were a great idea. But now everybody is pouring tons of money into them. Not sure this is a good idea, at least not on the scale how it is currently done. A stock is priced by supply and demand. There are stocks where there is basically very little real trading. Only ETF and some HFT funds. Yet, the stock is rising with the index. What happens in a downturn? What happens if this stock drops significantly more? Every ETF has to re-balance to reflect this fact, easily leading to a feed-back effect.
Some people betting on it:
There can still be active funds that perform better than the market, or the market as measured by an index ETF. Unfortunately with the way funds are marketed, funds can often just employ survivorship bias so that all funds look very good. Also, index funds do not have to outperform active funds/traders by definition, because not only can active funds invest in assets outside of the index (other stocks, real estate, futures, options, etc.), but active funds can also have more profitable allocations. Obvious proof: if the value of every stock in the S&P 500 were now worth 0, active funds wouldn't, ergo active funds will not necessarily always be outperformed by indexes.
I think that for your average investor, indexes are the way to go at the moment, but it's not impossible for there to be a world where active funds are often better.
This is true over any timespan. At any point in time the active part of the market holds the same stocks as the passive part of the market and thus has the exact same risk and returns. This is as true over a century as it is over a month.
>not only can active funds invest in assets outside of the index (other stocks, real estate, futures, options, etc.), but active funds can also have more profitable allocations
If your active fund is investing in different markets then it's not comparable to the index. If there's an advantage in investing in those assets the solution isn't to buy the active fund. The solution is to find the index funds that will also give you exposure to the same assets and buy those instead gaining the same advantage of the same returns with less fees.
Only market-cap weighted ones. And we are quickly moving away from such things with non-standard weightings and soon to be released actively managed ETFs.
1. An actively managed fund can make so-called "hedged" investments, or simply "hedges". For example, let's say there are 3 big carriage producers in the S&P500, but there's a lot of hype about this new "automobile" invention. We want to make money regardless of whether automobiles replace carriages. Unfortunately, there are about 20 different automobile companies vying for control over the industry, and only one of these is currently in the S&P 500. A hedge fund can spread investments between these companies so that, if/when an automobile company gets big, you're not overly exposed to the soon-to-be defunct carriage industry. Sure, the S&P is in some ways self-hedging since competitors will often both be included in the index, but it's ideally hedged for most things.
This may not be as much of a concern if you are simply looking to maximize returns over an indefinitely long time. But there are a lot of people looking for investment strategies that are less risky than the stock market as a whole: for example, people that are planning on retiring within the next 10 years.
2. Stocks don't always do well in every circumstance. How happy would you be if you invested in a Nikkei ETF 10-15 years ago? Sure there were troughs during then, just as there were in the S&P during that time, but you'll notice that even over relatively long timelines, most people wouldn't make much money from such an index. This leads directly to the next point
3. Hedge funds, to varying degrees, have assets outside of the stock market. These can include bonds (from treasuries which you might buy as an individual, to bonds with higher levels of risk, which you might not), real estate, options, commodities, futures, derivatives. They can also use leverage / trading on margin, which you probably can't/shouldn't. These asset classes provide other ways to hedge investments.
4. Hedge funds have better connections/information/technical ability than the average investor. This means they can talk to CEOs, respond to news faster or even instantly, or do analysis that's too complex for an individual.
I'm familiar with the Boglehead and /r/personalfinance canon, but I think they're focused on steering people away from hedge funds that your broker or "personal wealth advisor" suggest, which may average 6% yoy with a 1% fee. If it were possible for your average joe to invest in DE Shaw or Renaissance, I think that would be the ideal strategy (though, keep in mind that a large part of the reason these hedge funds are able to do so well is their size).
Also, I'm not sure how to prove this technically, but I'm pretty sure that the more the average investor gets invested in index funds, the more opportunity there is for actively managed funds to take advantage of the inefficiencies of the relatively static allocation of an indexed ETF.
2. Diversify globally to avoid single-country political,
economic and geographical risks (add Total International to balance your domestic stock)
3. If you really want to, buy a commodities ETF to further diversify (generally not recommended at more than 10% of portfolio and not a big deal either way)
4. But we've already seen that after fees they come out behind, so their 'better information' isn't translating into higher returns
The idea that 'too many indexers will kill indexing' has been around for a while and debunked for an equally long time. Here's a source for that:
At the end of the day, there's just no need to get crazy with things. Indexing works. It's reliable. You can sleep at night. I can't really imagine putting my money in the hands of a manager (or set of them). What if they get sick, or bored, or were just lucky early on? No need to add that layer of risk.
I realize that there are enough hedge funds out there that both things can be happening. It's too bad that there's so little visibility into the industry, it would be fascinating to see some kind of hedge fund taxonomy.
Hedge Funds have access to CEO's, they'll go in and interview them. Ostensibly, the CEO cannot say anything that is not 'public information' - but if you think about it, then why would the Fund even talk to the CEO if 'all info is public'?
Because a lot of nuance can be gained from in person interviews. Little tidbits of information gleaned can make a difference.
I'm not hugely knowledgeable of that industry, so I can't speak of the 'for sure' bad things happening, but I know at least one manager who does this.
Funny: he totally does not believe that they really gain an edge over the public. Then I ask him why he bothers with the interviews and he doesn't have a very good answer. It's almost funny. I suspect his fund partners have a better clue.
So that's one thing.
Another - is that simply by having fewer regulator requirements, hedge's can do all sorts of things that bigger funds cannot.
As far as 'hedge funds not doing as well as the S&P' - well - the S&P changes, and it's made of pretty good companies. Also - a lot of funds come and go - it may not just be 'survivor bias' - some may very well just be dam better than others. Almost all of the gains in VC go to top funds, and there's tons of churn in the bottom 50%, but that is a different dynamic.
If the evidence suggests access to CEOs like this works, there's probably something else going on. Maybe a bit more winking and "I didn't say this but..."
But a new question that is being raised is: "what happens if everyone only invests in index funds?"
If either index funds or active investors (after fees) make more money, capital will move to the one that pays more until they balance again. We have had way too many active investors for a long time which is why index funds have constantly outperformed active investors but eventually they will balance as more and more people move their money to index funds.
In other words, since the average active investor sets the average that passive indices track, how do they beat the average?
You have way too much faith in people making well informed decisions.
there are hundreds or thousands of index funds, all investing in different subsets of the market. money flowing back and forth between those funds will shift the relative value of their underlying sets.
also all the other answers, such as, that's unlikely to happen.
Do you think active investors determine the price of stocks now?
It definitely is / will in the future, and they will be capitalized on. This isn't really a catastrophic event.
These are two things you should think about when investing no matter what the vehicle is.
Thats a ridiculous thing to say when the inefficiency here would represent your investments getting wiped out
this whole study is based on the equities market, and there are many many capital markets out there with much higher returns.
the individual? right, none of these markets are so optimal for retirement, they are optimal for great returns though
this study wasn't about the individual, it was about funds of funds that were picked pretty unoptimally and most likely were also in the equities market.
what is the individual to do? hey maybe your conclusion was right, but I don't find 85% over ten years to be great, even factoring in dollar cost averaging and dividend reinvesting. so there is the possibility for the individual to learn and take risk or find a fund that is more suited to the market you would like to get returns in.
One of the interesting things Tim discusses is that this poor performance compared to market tends to make investors second-guess their investments (often for good reason looking at those returns), and buy into the fund that did well last year instead. So you're also getting into a sell-low-buy-high routine.
First, the numbers thrown around are that once you own 15 diversified stocks you have reduced your portfolio risk by 70 percent. That's not bad. At this point your volatility may not be that different than a market index. Of course it's different for every set of stocks, but I think this is a safe-ish guideline. So in that sense you are not missing out a whole lot.
Second, and more importantly, it is very simple to put together 15 stocks with a low volatility, but also with very low returns. This is because the vast majority of the returns of an index come from a very small number of outperforming stocks. It's like the 90-10 rule. 90 percent of an index's performance comes from 10% of the stocks. Those aren't the exact numbers, but when you only pick 15 stocks, it is very likely that you will totally miss out on all outperforming stocks.
Here's an article that talks about this in more depth and uses real numbers: http://www.efficientfrontier.com/ef/900/15st.htm
This is the only thing the parent commenter needs to read to understand why indexing is not equivalent to owning 15 stocks that theoretically reduce portfolio risk (my guess is that the stocks are highly correlated and have too high of weight towards IT and not enough towards boring fields like industrials).
That, ah, is even worse. Your diversification... isn't. Just because you have a job in IT doesn't mean that's adequate exposure. There is a large difference between a paycheck and investments in the large cap IT sector.
Does anyone know what the risk factors are (if any) to this type of passive investing if EVERYONE begins to do the same thing?
Every since I have had that conversation, I no longer invest in passive index funds or ETFs.
This is true and leading to very good insight.
>>ETFs will generally just hit an (automated) sell on everything across the board. So proportionally they will sell off significantly more volatile small and midcaps vs large caps.
This is absolute nonsense and something you hear from active investors pitching you an anti-index fund strategy. Index funds and ETFs tracking indexes will not have some absurd sell off that disrupts equilibrium, they will... just proportionally adjust to the index, since that is what they do.
Did your smart investor friend go into detail how this massive disruption could occur (what conditions would cause such a cyclical crash, because the only thing we have in our past that even comes close is the Great Depression, and had index funds existed then, it's not likely this activity would occur) or what the details are?
caveat: Vanguard index funds may be special and this doesn't apply to the same extent because the ETFs are a dual share class of the larger mutual fund.
Stocks can go crazy and this could create a death spiral on the ETFs, because an ever more frequent decline can lead to significantly more volatility in small and midcaps, and more people withdrawing funds from their ETFs, which in turn will cause more liquidations.
All reasoning (to some extent) is lost as to which assets to liquidate. Actively managed funds will generally liquidate assets that don't cause too much swings in share prices in a downturn. Liquidating $50MM worth of Google won't make a big difference, but liquidating $50MM worth of SmallCap generally will put significant pressure on the share price. On the flipside: imo it does create a significant buying opportunity when it comes to small cap stocks.
Tl;dr: in my view, the more money that ends up being managed passively, the easier it will become to beat the market as an active investor.
Those who believe in generally efficient markets want to capture the market return, however volatile, with as little tracking error as possible. Since the ETF holders don't actually sell any stocks when the prices decline, their returns are temporarily depressed. If and when prices recover so too will their value.
There is nothing unique about ETFs in this respect. Your critique is more about index funds in general, not ETFs specifically. ETFs practically differ from mutual funds only in things like transaction costs.
re your tl;dr: Sharpe's theorem shows that active investors will underperform passive investors after costs. Notice that this does not depend on the number of passive investors (and certainly at this point we're nowhere near any of the percentages of passively managed assets which people say may be worrying).
Overall, I do not think your critique is well-informed by the facts.
Second to that is that your returns will also depend on the risk you are willing to take. Investing through index funds and ETFs will correlate with a certain alpha, but that doesn't mean returns can't be higher if you are less diversified (and thus taking more risk).
Depending on the type of companies you are investing in, you might be comfortable taking a bigger risk with the goal of achieving a higher return.
Say you're working in technology and truly understand it, you can probably outperform the market significantly by investing in 3 to 5 technology stocks. Is it riskier? Yes. Is it worth it? Some people will say yes, others say no. And that is absolutely fine.
Thank you for showing others that you do not know what you are talking about.
This sentence actually means nothing.
Yes, some will. Many will also counter this by buying up the same assets as the price drops.
>>in my view, the more money that ends up being managed passively, the easier it will become to beat the market as an active investor.
This is absolutely true but also has nothing to do with your friend's legitimately unbelievable scenario.
Hedge fund are basically a compensation scheme masquerading as some sort of smart money management thing.
What's great is that the debate of passive vs active will go on forever - There will be periods where one outperforms the other - sure. But in the end, net of fees - active cannot win consistently, on average. Its human nature to believe we can beat the casino.
He keeps reiterating his parole that experts who actively select assets know more then the average Joe.
Even though the average Joe just completely blew them out of the water over a whole decade :)
But if the conclusion one draws is that the US large cap stock market is the place to put your money for the next 100 years just because it was great the last 100 years, I think that's the wrong lesson. Of all the markets in all the countries in the world, and all the asset classes, the US stock market has been an outlier for a long time, and it can't continue forever. Like Moore's law, and declining interest rates, and population growth, every trend stops somewhere since it would otherwise eat the world. Generally right at the point almost nobody is left to bet against it.
There is no such thing as completely passive management - someone at least selects components of an index, and you at least choose which index and that is always going to be pivotal with respect to investment success. I don't think there is logically any way around some degree of deliberate selection of assets. All people can do is pay less for the illusion of expertise.
Or one could be even more cynical, and observe that China appears to be pouring "hard" power behind decades of "soft" power build-up...
Yes, it's totally possible that Buffet just got lucky. But of the five stocks, over the 9 year period (45 data points), there are only 9 data points where a fund beat the S&P for the year. They all beat the S&P the first year, then for the next 8 years there were only four instances of a fund beating the S&P, and the S&P won for the other 36 data points.
If we were to assume that the funds vs the S&P was an equal playing field (each side had a 50% chance of winning), then there's just a 20% chance that Buffet just got lucky. But the point of actually paying a fund for advice isn't to just have equal odds, the funds are supposed to beat amateurs, and by a significant margin.
What we consider "significant" is obviously open to interpretation. But the most significant win a fund had over the S&P was in 2015 where fund C beat the S&P 5.4% to 1.4%, almost a 4x higher return. But the S&P had larger than 4x returns than the funds 12 times. I'm not exactly sure how to work all of that into a probability, but it's looking like the odds that Buffet just got lucky is pretty close to zero.
In the last 10 years, yes. Historically, it's been closer to 7% in real terms (adjusting for inflation). There are no guarantees that this will be the case for the future.
> Does that mean you can "just" invest ten times your yearly living expenses and practically live off idle income?
You'll need more than that because there are multi-year periods where the s&p 500 declines. The number that has been bandied around for a 'safe' withdrawal rate is 4% , so you'll need closer to 25 times your yearly living expenses.
> How does that not completely destroy the economy and
Because not everybody is doing it. If they were you wouldn't be getting those returns, obviously.
> why isn't everyone doing it?
Most Americans have less than $1000 in savings, let alone 10x their yearly living expenses.
Total market cap of SP500 is ~$20 trillion. Divided between US adults that is something like $80 thousand per adult.
- You have to consider risk. Perhaps use volatility as a proxy. Were the funds more or less volatile than the S&P? There are funds that are more and funds that are less. The bet ought to be adjusted for that, ie some form of risk adjusted return.
- It's a rigged bet. A fund of 5 funds of funds is going to be the market, minus fees. Yes there are funds that aren't just long the market but quite a lot will be. Many managers find it a sensible bet to add some beta, because the market often goes up and you will often be judged vs the market, not absolute returns. Throw them all together in a pot and all the spice is gone. Now take out fees.
- Plenty of individual funds did beat the S&P (I'll toot my own horn here), but to beat the average someone's gotta be under average, typically other hedge funds.
- You have to wonder how the bet would have fared had we not experienced the unprecedented reaction of central banks to the crisis. I don't know if Buffett had considered that, he's a smart guy, but it didn't seem like that was what the bet was about. If the market had been allowed to take a "more natural" course perhaps the funds would have looked better.
- You can find long periods in the past where the S&P was sideways. The constant advice to index is simplistic. Think about your own situation before you do that, there's at least a lot of interesting things to learn before you give up.
Seems to be a lot of response to this. Now I'm not saying it was particularly smart to bet against the market. In fact if you read closely you can see why. Which side of the bet would I have taken? Well, if I wasn't running a fund, I'd have taken Warren's side, for the same reason. As it happens you have very little credibility as a fund manager if you're not invested in your own fund, so I ended up backing myself. (Which is not quite the same as the bet.)
For your average guy, I don't think there's a smart way for you to pick a fund to beat the market. You have to spend time actually investigating each strategy. An example of a fund who I think will provide a risk-adjusted market beating return is a guy I met once. He knows a bunch of stuff in detail about the valuation of exchange traded funds, and has infrastructure (technical and legal) in place to exploit discrepancies. It's quite far away from what people normally talk about when they talk about "investment". Most managers do not do this; they will just give you a variant of "I'm good at guessing and I can handle risk".
Regarding central bank intervention, of course it's a manager's job to think about what might happen. I'm merely saying that most of them probably didn't see it coming, and that that is the major component of the underperformance. Consider that the HF marketing is basically "we'll think about the future for you". Now if what ends up happening is basically that you should buy everything and hold it, then why would you expect a guy who can predict turns to do any better than the market? Keep in mind you're paying fees for him to sell and buy as things go up and down. Note that several managers did in fact close down, not because of catastrophic losses, but because they got fed up with the game.
The question is: OK, you account for risk, now what? You can manage risk by tempering an all-stock portfolio with bonds, lowering volatility. Why pick high-cost hedge funds over that option?
> Throw them all together in a pot and all the spice is gone.
Except if you look at the breakdown, any one of those sub-funds did poorly. None beat the S&P.
> Plenty of individual funds did beat the S&P
But how is an investor to know in advance? Also: winning funds tend to rotate around - can't use past performance as a reasonable guide to pick a fund going forward.
> You have to wonder how the bet would have fared had we not experienced the unprecedented reaction of central banks to the crisis.
You can always argue this time was different, but the reality is we had roughly 7% average returns on the S&P over the course of the bet, which is pretty typical. It wasn't just some short period, either - for nine out of the ten years the S&P won the bet against the group.
> You can find long periods in the past where the S&P was sideways.
Which is why a smart portfolio is three-fund, covering global stocks and bonds. A portfolio of that makeup does not tend to travel sideways for long periods like the US market can alone. Take for instance 2000 to 2010, in which US stocks did go sideways - bonds and international stocks compensated for that.
At the end of the day, instead of excuses/explanations (no offense intended) I'd like to see you make a case for who should be using hedge funds and why.
I think his point is that hedge funds may have higher risk-adjusted returns than the S&P 500, despite lower absolute returns. For (ridiculously unrealistic) example, say you have an average 7%/yr return on the S&P 500 with volatility of ~14% and a hedge fund with a 5%/yr return but volatility of ~1%. At the end of the time period, a fixed $1M investment is clearly going to come ahead on the S&P 500 but the hedge fund is clearly the better fund, as matched for volatility (through leverage) with the S&P 500, the returns would be 70%/yr.
You'd pick the hedge fund because matched for volatility (through leverage or bonds or what have you), the hedge fund performs better.
Meanwhile, though, a generic vanilla Total Bond market index fund over the past 10 years returned 4.3% annually. A $100,000 investment would have turned into over $150,000 over the course of the bet, higher than the hedge fund collection. So the hedge funds would have to have less volatility than a very steady intermediate-duration bond fund, which, incidentally, had far lower draw-downs in its worst years. So at the very least, in plain language, if 'big drops' are a measure of risk, then the hedge fund set was riskier than bonds and still lost to bonds.
- He made a bet with the manager of Hedge funds that picked 5 funds of funds. None of the picked fund of funds performed better than S&P. So it is 5 against 1. We can say that this manager picked the wrong one, but none other took the risk of the bet...
- Look at the first chart just at the top of the article. Hedge funds performed on average less than the S&P. It is based on 1,916 funds, all coming from Barclays hedge fund index. https://www.barclayhedge.com/research/indices/ghs/Hedge_Fund...
- You mention that plenty of individual funds did beat the S&P. This is straight an apocryphal anecdotal fallacy. Because Bill Gates dropped school and is rich, would you advice everybody to drop school to become rich?
I understand you are trying to defend your business. However, I was not convinced based on your arguments.
No, no it isn't. Individual funds have beaten the market for 20 - 30 years at a time. You won't even hear about most of them unless you really go digging, for a combination of reasons:
1. Funds that actually, consistently beat the market quickly find themselves in possession of more money than they know what to do with. They don't need to advertise themselves to the market, because they can find plenty of capital at the terms they want within their own network. Why inflate your fund to the size and publicity of Bridgewater if you can avoid it? The salesmanship of a given fund is typically inversely proportional to the return it achieves.
2. Per #1, when I say they have more money than they know what to do with, I mean that literally - they hit capacity constraints on their trading strategies and eventually cannot use more capital profitably even if they wanted to. They can spin off satellite funds to test out various strategies, but by and large the secret sauce engine will have to grow at a much slower rate from then on. This further compounds reason #1 - not only do they not need to seek out investor capital, they'll eventually stop being "on the market" for new investors at all, further reducing their publicity.
3. Finally, having investors is a logistical burden. The only reason to actually have outside capital is to pool risk so you - once you have enough capital and you've hit a capacity such that you can no longer scale up, you might as well return the investors' money and close the fund to outside investment. Why share the risk when you're already wealthy and have been doing this for 20 years?
Everyone has heard of Renaissance Technologies because they're legendary, but in my opinion we are lucky to even know about them to the extent that we do. Had James Simons not needed to pool risk and take outside investment in the initial days, we would likely not know about him beating the market with an average 70% return for three decades. There are many funds, like TGS Management, which are essentially comparable to RenTec but which far fewer people know about because they have no reason to be known.
I concede that this is not helpful information for an investor trying to figure out where to park money for legitimately superior returns, but that's a different matter than the fact that these funds do exist and that this bet is basically irrelevant for them.
You are saying there is a underground, invisible branch of investment that make a lot of money. But they can only condensate this money in small volumes to go under the radar. And that if people knew about it, it would loose its magic. It smells like a scenario from a movie your story!
I'm also not establishing a conspiracy here. There's nothing underground or invisible about this industry, and I've worked in it peripherally myself. It's only under the radar in the sense that most Americans can name the president but not most other high ranking members of the cabinet: the spotlight is not on them. If you go digging, you'll find them. They just don't typically attract the same attention firms like Bridgewater do because they don't typically seek more capital for its own sake just to spin off more funds.
> You mention that plenty of individual funds did beat the S&P. This is straight an apocryphal anecdotal fallacy.
No it isn't. If the guy was smart about what was being bet on he'd have picked RenTech and he'd have won.
> I understand you are trying to defend your business.
Nope. Just providing some colour so they don't think it's as simple as it sounds.
Yeah, I don't really understand this. People give me flak for saying it, but I can think of five or so funds off the top of my head (Renaissance included) that I would have happily picked and handily beaten Buffett. I'd make the bet again, today. But like I also always say - Buffett wouldn't have taken that bet up with me, because Buffett doesn't believe in efficient market hypothesis either and is almost certainly aware that individually chosen hedge funds could beat an index fund.
He lost the bet because he chose a fund of funds reflecting the aggregate hedge fund industry; anyone who is even casually familiar with hedge fund returns as an industry wouldn't be surprised at all by the outcome. His choice doesn't even reflect the decision that most rational investors have to make: given a diversified index fund tracking the market and an index composed of the (much smaller) hedge fund market, choosing the latter is silly. A more coherent (and successful) strategy would have been to choose a single fund, or a small basket of funds, known for beating the market for decades at a time. An index fund is a curated portfolio of companies with criteria that make them attractive investments by definition; the fund of hedge funds, in contrast, tracks an industry that mostly doesn't beat the market except for a few outliers.
In other words, the bet didn't really prove anything other than that the hedge fund industry overall is less attractive than the broader market. But I really don't think that was ever up for serious debate among the informed, and now this bet has been modified as a talking point for something it doesn't prove whatsoever: that individual hedge funds are incapable of beating index funds (which is trivially and demonstrably false).
The context of the original challenge suggests that this was the intention. I actually think that it proved something a little stronger.
If some moderately savvy investor were deciding whether to invest her $1m in index funds or hedge funds, she would actually have to choose which hedge fund to invest in. Presumably Ted Seides knows more than our example investor would about hedge funds (and has access to more of them she would). So Ted is an (optimistic) stand-in for how well she would actually have done, which is frankly the more relevant question.
On a related note, Ted probably didn't invest in RenTec, or at least not the Medallion Fund, because he can't. Most funds. like Medallion, that can consistently beat the market will either stop taking additional investments or straight up return capital to investors and trade their own money. Buffett doesn't actually go so far as to claim that no one can beat the market (after all, he did); his claim is merely that our average investor can't really take advantage of it to beat the market themselves.
I think one of the fundamental problems is, that it is even more difficult to pick a winning fund than a winning index. So, what's my advantage as an amateur investor here.
maybe you mean that over most 10 year periods you think he wouldn't have won the bet. that point is defensible. but this reads a little bit like "its not my fault an uncertain outcome happened"... well, that is how gambling works my friend.
Second point not related to parent post: it seems that picking the experts is every bit as hard as directly picking great investments. There are so many investors who were portrayed in the financial press as "The next Buffett" but went on to have poor returns. I can think of four or five of these guys off the top of my head. And then beyond that there must be literally tens of thousands of full-time mutual fund salesmen who fail to pick mutual funds for their clients that beat the market. So in addition to the underperformance of the funds, there's very often another layer of scraping on the transaction.