Hacker News Board Hacker News, browsed like a classic message board
Live data from Hacker News

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

aei.org

Post reply on HN
Print view View original

121–130 of 323 posts

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

#121

Post by the_cat_kittles »

wpietri wrote: post #67

And I'm just going to self-promote a bit and say that the bet was registered via a project I worked on, the Long Now Foundation's project Long Bets: http://longbets.org/ 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…

this utterly rules. like, i want to fly to your current location to give you a fist bump. in my utopian dream world, every political pundit has to put their thoughts on here.

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

#122

Post by tanderson92 »

charlesdm wrote: post #119
tanderson92 wrote: post #114

Earlier quoted context omitted.

This is incorrect, especially with ETFs. With an ETF, the seller/buyer (the individual, not the fund) pays all of the transaction costs. So buying and holding an ETF doesn't expose you to the problems which the behavior of panicking investors^ . The same is not always true for mutual funds. 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…

But you are still exposed to the market, which can decline significantly. People will withdraw money from their passively managed funds when the market starts tanking. We have no idea what will happen in the next 'fear trade' when everyone starts dumping shares. 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 smal…

There are two concerns: transaction costs (tracking error relative to index return) and index return.

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.

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

#123

Post by ycombobreaker »

cm2187 wrote: post #53
RandomInteger4 wrote: post #51

Earlier quoted context omitted.

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.

The exchange is not a counterparty. You have market makers there as well. Even in very liquid markets, it may be common to trade against market makers, just at a tighter bid-ask spread.

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

#124

Post by bhouston »

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 understand a lot of the top performing hedge funds operate via insider information.

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

#125

Post by desas »

rwmj wrote: post #113

Question for financial types: For a few years I've owned a small selection of shares in FTSE companies (15 of them at the moment). I don't really do this scientifically, I just look for large, well-established companies where their shares look cheaper than long run, and buy those. (Partly I do this so I can see everyday companies that I own a tiny bit of). Is this practically equivalent to owning index-linked funds?…

No it's precisely the opposite. You're gambling that you can beat the market for those 15 funds, index linked funds are gambling that the value of the market (index) as a whole will increase and will try to perform to the market. To do that they buy shares in all of the companies that are in the linked index (in proportion).

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

#126

Post by ng12 »

blfr wrote: post #58
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.

I think that's an important point. The problem good funds have is not finding more capital but being able to manage it without cannibalizing their own returns. Anybody trying to sell you a hedge fund is probably not selling a very good one.

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

#127

Post by mooreds »

dnautics wrote: post #42
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?"

I don't think this is necessarily the case. I think if you're warren buffet, you should invest in index funds. If you're not warren buffet, this strategy runs the risk of being horrifyingly bad. For many people their job prospects may be procyclical - it's easier to get a job when the overall market is high and it's easier to get laid off when the overall market is in the pits. For these people, investing in index fu…

This gets back to time horizon and risk tolerance, which are independent of return.

These are two things you should think about when investing no matter what the vehicle is.

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

#128

Post by charlesdm »

tanderson92 wrote: post #122
charlesdm wrote: post #119

Earlier quoted context omitted.

But you are still exposed to the market, which can decline significantly. People will withdraw money from their passively managed funds when the market starts tanking. We have no idea what will happen in the next 'fear trade' when everyone starts dumping shares. 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 smal…

There are two concerns: transaction costs (tracking error relative to index return) and index return. 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. Th…

To each their own investment style (and there are many), but markets (in my view, and in the view of many others) are not efficient. (More than) half of what determines the stock price is psychology and herd mentality. It's not just numbers, and more an art than it is a science. Larger cap stocks however are generally priced more correctly than small- or mid cap stocks.

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.

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

#129

Post by dsacco »

lordnacho wrote: post #99
batmansmk wrote: post #77

Earlier quoted context omitted.

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 perfor…

No, you are the one who has misunderstood something. I'm saying it's rigged against the fund chooser. Read it again. > 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 co…

> 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.

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).

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

#130

Post by vowelless »

the_cat_kittles wrote: post #121
wpietri wrote: post #67

And I'm just going to self-promote a bit and say that the bet was registered via a project I worked on, the Long Now Foundation's project Long Bets: http://longbets.org/ 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…

this utterly rules. like, i want to fly to your current location to give you a fist bump. in my utopian dream world, every political pundit has to put their thoughts on here.

Even if they get funded by special interest groups to spew the group's narrative, at least this will be a quantization of how correct or incorrect the pundits are.
Post reply on HN