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

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

#51

Post by RandomInteger4 »

osrec wrote: post #30

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 alloc…

I've only dabbled a little in cryptocurrency exchanges, so the terms seem to refer to the same thing to me, but maybe it's contextual? Forgive my ignorance, but can you explain the difference between market makers and speculators?

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

#52

Post by ThrustVectoring »

jonahx wrote: post #22
ThrustVectoring wrote: post #18

Earlier quoted context omitted.

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.

If you average together a lot of stock pickers, you wind up with roughly a market-cap weighted index. If you average together everyone who holds stock, you wind up with exactly the market-cap weighted index.

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

#53

Post by cm2187 »

RandomInteger4 wrote: post #51
osrec wrote: post #30

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 alloc…

I've only dabbled a little in cryptocurrency exchanges, so the terms seem to refer to the same thing to me, but maybe it's contextual? Forgive my ignorance, but can you explain the difference between market makers and speculators?

You have market makers where you don't have an exchange, or where there is very little liquidity. Usually a bank but not always. They are there to "make a market", i.e. to offer liquidity to clients. Speculators take a directional position. Market makers make money on the bid/offer.

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

#54

Post by RandomInteger4 »

perl4ever wrote: post #11
ModernMech wrote: post #3

Reminds me a little of traffic. Yesterday I was cruising down the highway in the leftmost lane, going about 80 with a line of other cars. The other two lanes were actually more clear, but cars were going much slower. 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…

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…

I don't drive, but as a passenger, it is my understanding that the left lane is the fast lane and the right lane is to remain empty or mostly empty so cars can enter and exit the highway?

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.

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

#55

Post by d4l3k »

RandomInteger4 wrote: post #54
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…

I don't drive, but as a passenger, it is my understanding that the left lane is the fast lane and the right lane is to remain empty or mostly empty so cars can enter and exit the highway? 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.

It's the law to keep to the right in most states.

For instance, Washington state: http://app.leg.wa.gov/rcw/default.aspx?cite=46.61.100

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

#56

Post by ThrustVectoring »

mrep wrote: post #36
baron816 wrote: post #32

So clearly, for the individual, the optimal strategy is to simply invest in index funds and just wait. But a new question that is being raised is: "what happens if everyone only invests in index funds?"

This has been answered a thousand times. Everyone will never invest in index funds. What will happen is more and more people will invest in index funds until there are so little people actively investing in the stock market that the ones that do are able to beat it. However, them beating it will only net (after their fees) the same returns as index funds thus striking a balance where index funds match the performance…

How does the active part of the market beat the rest of the active part of the market? Like, I could see the net fees of the active funds being equal to the underperformance of "dumb money" retail investors mis-picking stocks.

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

#58

Post by blfr »

osrec wrote: post #30

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 alloc…

Nothing works forever but there are funds like Renaissance Technologies' Medallion which may just be getting heads for a long time but rather seem to have some secret sauce that works for a long time. Usually though they're not very large and don't seek out investments.

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

#59

Post by alkonaut »

ModernMech wrote: post #3

Reminds me a little of traffic. Yesterday I was cruising down the highway in the leftmost lane, going about 80 with a line of other cars. The other two lanes were actually more clear, but cars were going much slower. 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…

This was tested in an experiment I can't find now. One group of drivers was asked to stick to one lane, the other group was told to switch lanes when possible to get ahead.

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.

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

#60

Post by misnamed »

lordnacho wrote: post #43

Hedge fund guy here. - 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…

> You have to consider risk.

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.

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