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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

#131
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?

A market maker takes both sides of the market, and makes money on the spread.

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.

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

#132

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 perfor…

> You mention that plenty of individual funds did beat the S&P. This is straight an apocryphal anecdotal fallacy.

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.

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

#133

Earlier quoted context omitted.

That never happens. There will always be people who want to be different from the herd. Any inefficiencies will take care of themselves.

>Any inefficiencies will take care of themselves. Thats a ridiculous thing to say when the inefficiency here would represent your investments getting wiped out

making less money isnt the same thing as being whiped out.

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

#134

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.

This doesn't apply at all in most of California. We need the left lane for capacity, not flow regulation. Also left lanes are frequently diamond lanes, so you're basically telling people not to carpool.

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

#135
post #58
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.

Yes, Renaissance is an exception. I would argue that their nature of their strategies almost puts them into a pseudo market maker category (I've personally never worked with/for them, but I hear much of their strategy is statistical arbitrage, made possible by favourable transaction fee set ups and fast, colocated execution infrastructure).

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

#136
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.

This is sometimes true, and in my opinion, happens more at the smaller, unregulated hedge funds where the volumes can go undetected.

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

#137
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.

Is your understanding that they operate via illegal insider information, or access to information that is very difficult to achieve?

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.

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

#138
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…

That's a very cool project! Congratulations on keeping it going for so long!

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

#139
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?…

There's two parts to this answer.

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

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

#140
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…

On https://longbets.org/register/, it says that "Long Bets registration is temporarily disabled. Please check back soon."

Why is registration temporarily disabled? Can I get an email notification when it's back up?

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