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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

#71

Post by icelancer »

watsocd wrote: post #19
TuringNYC wrote: post #17

Earlier quoted context omitted.

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.

You are correct except that doing this over 10 years somewhat removes the 'ignoring the volatility' argument.

>>You are correct except that doing this over 10 years somewhat removes the 'ignoring the volatility' argument.

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...

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

#72

Post by misnamed »

the_cat_kittles wrote: post #64
misnamed wrote: post #62

Earlier quoted context omitted.

It's not like we don't have various periods to look at either - from the chart I saw it looked to me like the hedge funds lost 9 out of the 10 years. So sure, you can say 'some unusual stuff happened in there' but ... 9 out of 10 years speaks for itself.

lol i didnt even look, but yea. guess there is really no defending it. guess most of them suck at gambling. but that seems to be how these things work, a large large majority of people end up loosing when they do fantasy sports, or poker, or political futures markets, or stock picking, and the gains go to a small minority. like, even if you are better than 90% of people at one of those things, youll probably lose mon…

Exactly - the headwinds in this case are strong. Even if you're just talking about actively-managed mutual funds versus passive indexes, you're talking about overcoming the 70th percentile after fees/taxes on average. So you can't just beat half the other players, and you can't just do it one time - you have to beat more like 2/3 and do it consistently over the years to overcome drag. In studies done on this, most active managers who beat the index either (a) take on a lot more risk, and/or (b) can't do it consistently and eventually fall behind.

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

#73

Post by mjevans »

mercutio2 wrote: post #29
matthewmcg wrote: post #14

Earlier quoted context omitted.

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 d…

Thanks, that helps explains why my driving experience is so poor. There isn't a national standard for the protocol so everyone gets together and has impedance mismatches.

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.

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

#74

Post by Jabbles »

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…

You can't assume that we'll reach equilibrium in a different future situation given that we're not in equilibrium at the moment.

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

#76

Post by brookside »

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.

The left lane should be the one generally remaining empty, and used for passing.

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

#77

Post by batmansmk »

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…

I can only but point you back to read the article. You may have misunderstood some facts:

- 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.

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

#78

Post by physguy1123 »

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 expect that you are right about a significant number of funds (I would say most long-only funds). But a decent chunk of the industry exists because investors want higher-sharpe investments than the market even if they don't beat a bull market and/or investments that will remain uncorrelated with the market.

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.

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

#79

Post by johnnyb9 »

misnamed wrote: post #60
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…

What about the fact that certain strategies can only be invested in but for hedge funds?

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

#80

Post by rhizome »

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…

As far as driving goes, you never know why someone else is in a hurry. Sometimes they're trying to get to an emergency.

Hope you were comfortable with your band of other left-lane cruisers, though.

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