Buffett wins $1M decade-old bet that the S&P500 would outperform hedgefunds • Hacker News Board

Re: Buffett wins $1M decade-old bet that the S&P500 would outperform hedgefunds

#21

Post by guelo » Sun, Sep 17, 2017, 5:11 PM UTC

ThrustVectoring wrote: post #18

dsr_ wrote: post #12

Has anyone done the analysis to see if the stock-picking by those managers was worth anything at all? 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.

If it's just stock-picking as opposed to getting access to a wider variety of investments, then it's very difficult for active stock picking to be worth anything. If stocks are owned just by stock-pickers and passive indexers, then they own the same stocks in the same proportion. 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 lik…

But the hedge funds in Buffet's bet did make those wider variety types of investments.

Re: Buffett wins $1M decade-old bet that the S&P500 would outperform hedgefunds

#22

Post by jonahx » Sun, Sep 17, 2017, 5:12 PM UTC

ThrustVectoring wrote: post #18

dsr_ wrote: post #12

Has anyone done the analysis to see if the stock-picking by those managers was worth anything at all? 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.

If it's just stock-picking as opposed to getting access to a wider variety of investments, then it's very difficult for active stock picking to be worth anything. If stocks are owned just by stock-pickers and passive indexers, then they own the same stocks in the same proportion. 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 lik…

> 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.

Re: Buffett wins $1M decade-old bet that the S&P500 would outperform hedgefunds

#23

Post by perl4ever » Sun, Sep 17, 2017, 5:12 PM UTC

TekMol wrote: post #13

islayfan wrote: post #4

For context the losers argument is that Buffet picked a good team in a good period and he would have a good chance in a second cycle. https://www.bloomberg.com/view/articles/2017-05-03/why-i-los... .

A weak attempt at damage control. 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 :)

I agree that said experts probably don't know enough to justify their cost.

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.

Re: Buffett wins $1M decade-old bet that the S&P500 would outperform hedgefunds

#24

Post by neosat » Sun, Sep 17, 2017, 5:12 PM UTC

islayfan wrote: post #4

For context the losers argument is that Buffet picked a good team in a good period and he would have a good chance in a second cycle. https://www.bloomberg.com/view/articles/2017-05-03/why-i-los... .

Reading his 'footnote' - he still does not seem to get it. The fact is precisely because of all these factors (among others) Warren was so confident in this bet. He knew the terms and the environment very well before taking on the bet. Calling the outcome the result of 'anomalous' market behavior is just denial at this point.

Re: Buffett wins $1M decade-old bet that the S&P500 would outperform hedgefunds

#25

Post by quuquuquu » Sun, Sep 17, 2017, 5:19 PM UTC

matthewmcg wrote: post #14

perl4ever wrote: post #11

Earlier quoted context omitted.

Some people think you should not be in the left lane unless you are passing at that moment. In some places, there are even signs saying "keep right except to pass". Perhaps this person was driving aggressively because they were enraged at the line of traffic on the left. Which is to say, they may not have been doing it for a quantitative benefit as you assume. This might strengthen rather than weaken the analogy to t…

It's not just some people. It is actually the law in most states (albeit a seldom-enforced one). Don't cruise in the left lane.

Most people cruise at a speed that is faster than everyone else in the other (non-left) lanes.

But, please don't be the car that is cruising at 60mph in the left lane. It is a leading cause of accidents.

Re: Buffett wins $1M decade-old bet that the S&P500 would outperform hedgefunds

#26

Post by alexasmyths » Sun, Sep 17, 2017, 5:20 PM UTC

mojoe wrote: post #6

I feel like there's some cognitive dissonance surrounding hedge funds in popular culture -- on the one hand you have people saying that any outsized short-term gains seen by hedge funds are the result of some selection/survivorship bias, and on the other hand you have people saying that any outsized returns are the result of illegal privileged information (see the TV show 'Billions'). I realize that there are enough…

It doesn't have to be illegal.

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.

Re: Buffett wins $1M decade-old bet that the S&P500 would outperform hedgefunds

#27

Post by smeyer » Sun, Sep 17, 2017, 5:22 PM UTC

TuringNYC wrote: post #17

dsr_ wrote: post #12

Has anyone done the analysis to see if the stock-picking by those managers was worth anything at all? 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.

Investments can have a dual mandate - high returns BUT also low volatility. Many hedge funds will admit their returns may not beat the S&P500, but will counter that their returns have lower volatility -- achieving more consistent gains over time. 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.

But the opposing bettor got to pick the funds, it's not like Buffett forced anyone to pick funds with risk profiles less likely to result in beating the market.

Re: Buffett wins $1M decade-old bet that the S&P500 would outperform hedgefunds

#28

Post by drdeadringer » Sun, Sep 17, 2017, 5:22 PM UTC

matthewmcg wrote: post #14

perl4ever wrote: post #11

Earlier quoted context omitted.

Some people think you should not be in the left lane unless you are passing at that moment. In some places, there are even signs saying "keep right except to pass". Perhaps this person was driving aggressively because they were enraged at the line of traffic on the left. Which is to say, they may not have been doing it for a quantitative benefit as you assume. This might strengthen rather than weaken the analogy to t…

It's not just some people. It is actually the law in most states (albeit a seldom-enforced one). Don't cruise in the left lane.

.

Re: Buffett wins $1M decade-old bet that the S&P500 would outperform hedgefunds

#29

Post by mercutio2 » Sun, Sep 17, 2017, 5:24 PM UTC

matthewmcg wrote: post #14

perl4ever wrote: post #11

Earlier quoted context omitted.

Some people think you should not be in the left lane unless you are passing at that moment. In some places, there are even signs saying "keep right except to pass". Perhaps this person was driving aggressively because they were enraged at the line of traffic on the left. Which is to say, they may not have been doing it for a quantitative benefit as you assume. This might strengthen rather than weaken the analogy to t…

It's not just some people. It is actually the law in most states (albeit a seldom-enforced one). Don't cruise in the left lane.

I wish this were true of most states in the USA. It’s certainly true in many parts of Europe.

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:

http://jalopnik.com/5501615/left-lane-passing-laws-a-state-b...

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.

Re: Buffett wins $1M decade-old bet that the S&P500 would outperform hedgefunds

#30

Post by osrec » Sun, Sep 17, 2017, 5:25 PM UTC

This does not surprise me.

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.