Shouldn't this problem self-regulate, though? Ultimately, investors mainly care about the returns and if you can get better returns elsewhere due to these fees, they will switch.
If they can charge large amount of fees and still stay competitive, then good on them, right?
jfengel 35 days ago [-]
There's a lot of friction. You won't switch based on one year, which would just leave you chasing last year's lucky winner (who will likely revert to the median next year). It takes a long time to realize that your hedge fund is a loser.
The whole point of a hedge fund is for you to let someone else do the worrying. So the market is decidedly inefficient.
chii 35 days ago [-]
> It takes a long time to realize that your hedge fund is a loser.
it's been many decades since the existence of statistical analysis of hedge funds (as an aggregate) that demonstrates their lack of edge over benchmark passive index funds.
Some hedge funds would still out-perform. Most don't, and those who do tend to charge fees up to their level of edge, and leave only index-benchmark returns for their investors.
If you don't heed this evidence now, you deserve to lose money to these funds.
testval123 35 days ago [-]
The purpose of a hedge fund is to ‘hedge’ ie deliver alpha and not index beating returns. Obviously the fee issue is another layer.
jfengel 33 days ago [-]
That was the original idea. They realized that they could also run the risk equations in reverse and make index beating returns, at least in the short run, and pretend that they could also do it in the long run. Hedge funds got a reputation as overpowered mutual funds for the wealthy.
comboy 35 days ago [-]
It's kind of like buying lottery tickets from a vendor and when you win, but he steals the winnings, you switch to another one.
Except, also, you don't actually ever see the tickets.
k-i-r-t-h-i 34 days ago [-]
> Ultimately, investors mainly care about the returns
Not quite. It also matters how and when returns are generated. Some vol funds make 1–3% a year on average, but they still manage billions because when markets crash, they (presumably) crush it — and that’s when investors need them the most
bushbaba 35 days ago [-]
Depends on if there’s capital gains tax when leaving the firm.
financetechbro 35 days ago [-]
Perhaps. But HF capital is usually locked down for a few years. So there is some friction to switching
ptero 35 days ago [-]
True, but I believe (although last explored this question a long time ago) that the majority of the capital is not locked.
financetechbro 34 days ago [-]
Quick search shows current lock ups range from 6mo to 2yr. There are also some funds that have withdraw limits and short windows for doing so (I.e. once a quarter perhaps), but of course these tighter restrictions are only relevant for the funds that have the clout to implement them
asdasdsddd 35 days ago [-]
1. Crazy graph format lol
2. I thought management fees were supposed to pay for comp?
3. Buying SPY wins again?
4. I don't really care about rich people getting ripped off, but I wonder if any of my money leaks into these funds
bberenberg 35 days ago [-]
I think you need to consider time horizons when analyzing these funds. You can buy SPY and it will win. Unless there is a market crash when you hit retirement age, in which case you are screwed until the market recovers. If you don't mind the risk, go 2x levered and you will do even better. [0]
Many institutions and HNW and UHNW individuals prioritize consistency over absolute growth. They would rather make 6-8% a year and reduce downside risk than optimize for gains. Multi-strat funds like this one are catering to people who want that product.
2x leaves at the mercy of margin calls, which inconveniently come at the moment where you least want to sell (right after a huge crash). Getting margin called after a 50% crashes leaves you with $0, as an example.
A 50% market crash would be brutal even without leverage, but at least no one would force you to sell.
cj 35 days ago [-]
You can achieve 2x leverage without the risk of margin calls by buying ETFs like SPUU (or SPXL, UPRO if you want 3x leverage).
casercaramel144 35 days ago [-]
That's a really bad idea, those rebalance daily, so you are basically betting against short-term volatility (if spy goes down 10% in a day then up 10% the next, you are down 1% on spy, on a 2x levered etf you are down 4% or 4x the loss). Also both fees and slippage are really terrible on all levered ETFs
If you really want to do 2x lever its probably best to just buy 6 month or 1 yr dated ITM calls. They're quite cheap and very liquid on SPY.
arcticbull 35 days ago [-]
And yet UPRO (3X SPY) has significantly outperformed 3X the S&P 500 since inception (since June 2009 UPRO is +8000% vs SPY +700%.
The reason is exactly what you described actually. If the underlying exhibits positive momentum, generally trending up instead of oscillating back and forth, the daily balancing works for you instead of against you and the ETF outperforms the target multiple of the underlying.
Yes, if your S&P returns over 3 days are +10%, -10%, +10% then SPY is up 8.9% while UPRO is up 18% (2X, not 3X).
On the other hand if your S&P returns over 3 days are +10%, +10%, +10% then SPY is up 33% while UPRO is up 120% (4X, not 3X).
The big levered ETFs have reasonable volume and limited slippage for any volume retail investors would be trading. Fees are like 0.9% which all things considered isn't bad - given their vast outperformance.
I'm not saying go all in on these, what I'm saying is that your analysis of the levered funds is missing some important details which show up on a quick backtest. If you understand the products and what bet you're making with them, they can be quite reasonable to hold long term - despite popular misconceptions.
> If you really want to do 2x lever its probably best to just buy 6 month or 1 yr dated ITM calls. They're quite cheap and very liquid on SPY.
Respectfully those are much more expensive and if you're near the money quite non-linear. You're going to have to pony up pretty close to the price of just buying the index again to get 2X exposure if you're deep ITM. Near the money you'll need several options to get 2X - and you'll need to delta rebalance. You'll also get eaten alive by theta decay.
To avoid having to pony up a ton of collateral or get eaten by theta, you may as well just buy more SPY on margin - or save yourself the hassle and get an /ES=F or /MES=F.
If you insist on trying to trade the S&P 500 with options (especially if your expiration is only 6-12m away) use SPX or XSP -- not SPY. They're cash-settled European index options, so no early exercise to worry about, no dividends to worry about and they get 60/40 capital gains treatment no matter how long you hold them for.
pinkmuffinere 35 days ago [-]
+1, the criticism of “if s&p goes up and come back down, leveraged investments lose” is just insufficient as a criticism. It examines only one case. I’m probably 30% in SPUU for years now, and would like to hear real criticisms — do you have any real criticisms to share? I legitimately have found so little competent commentary on it, and I think I understand the risk I’m taking, but don’t want to miss an opportunity to get considered input.
jcalvinowens 34 days ago [-]
> I’m probably 30% in SPUU for years now, and would like to hear real criticisms — do you have any real criticisms to share?
I'm no expert. But it seems like writing out of the money options: it's "free money" until the market suddenly moves against you, and you get your head chopped off. When that inevitably happens, the loss has a good chance of more than wiping out all your prior gains.
pinkmuffinere 34 days ago [-]
Not to “fight“, but just to add to the conversation:
I agree it is taking on more risk, although potentially less than with out-of-the-money options. To lose 99% of spuu’s value the sp500 would have to drop 50% in one day, or 35% for three days in a row, or 20% for nine days in a row, etc with infinite similar cases. It’s not a rigorous argument, but I think those examples give a feel for how common/rare that occurrence would be — I think these particular cases have never happened since the sp500 started.
But it’s certainly riskier-than-traditional in either case
arcticbull 34 days ago [-]
> To lose 99% of spuu’s value the sp500 would have to drop 50% in one day...
Which is exceedingly unlikely because of the circuit breakers. A level 3 breaker is triggered after a 20% decline and halts trading for the remainder of the day.
pinkmuffinere 34 days ago [-]
Oh wow good point! The existence of breakers lurked in the back of my mind, but I didn’t realize the implication there. That is nice.
arcticbull 33 days ago [-]
Not that a 60% 1-day decline would be welcome by many investors :P
mgfist 32 days ago [-]
They picked a great time to launch it!
Not sure it would've gone so well had it happened in 2007
casercaramel144 34 days ago [-]
Finance SWE here, sorry if what I say is wrong. Please correct me if that's the case.
>And yet UPRO (3X SPY) has significantly outperformed 3X the S&P 500 since inception (since June 2009 UPRO is +8000% vs SPY +700%.
Isn't this just hindsight bias? You market time to right after 2008 crash. Those two dates are probably the best possible because from 2009->2020 we had an 11 year uninterrupted bull run.
If you bought in 2020-2021 you would have been screwed for 3 years at the least. If you bought 10x levered out of the money spy calls every 6 months and roll the winnings since 2009 you probably can get even higher, but probably you don't want to do that.
>Respectfully those are much more expensive and if you're near the money quite non-linear. You're going to have to pony up pretty close to the price of just buying the index again to get 2X exposure if you're deep ITM. Near the money you'll need several options to get 2X - and you'll need to delta rebalance. You'll also get eaten alive by theta decay.
Isn't this for retirement saving? IE where we have big chunks of cash we won't see for 20 years, so you can buy like 2 contracts and its good enough. You'd have to pony up 2x to get the underlying index fund anyways, so you might as well just buy deep ITM calls (which right now are hovering at a premium of 3% for strike of 315$ on spy).
+1 for European options, I forgot you can buy those on index funds, is the liquidity enough on deep OTM calls to be worth it though?
>To avoid having to pony up a ton of collateral or get eaten by theta, you may as well just buy more SPY on margin - or save yourself the hassle and get an /ES=F or /MES=F.
I thought margin / borrowing costs for future etfs is some ridiculous 8-12%. Pretty bad if you have no alpha except beta go up!
arcticbull 34 days ago [-]
> Isn't this just hindsight bias? You market time to right after 2008 crash.
Yes absolutely, I just picked when the product launched.
I wanted to point out to parent that the daily balancing isn't just a bad thing, it can be a good thing - it depends on how the underlying performs. You are right it cuts both ways though and you may have to sit in them for years to break even. Note UPRO actually somehow pays a dividend.
> If you bought 10x levered out of the money spy calls every 6 months and roll the winnings since 2009 you probably can get even higher, but probably you don't want to do that.
What do you mean by 10X leveraged calls? Like 10-delta? What was the spread between implied and realized volatility over that period? Ultimately your options outcomes are really based on realized volatility exceeding implied volatility (otherwise you break even or lose).
> Isn't this for retirement saving? IE where we have big chunks of cash we won't see for 20 years, so you can buy like 2 contracts and its good enough.
Parent said contracts that expire in 6 or 12 months on SPY. That means short term capital gains at expiry, and using SPY instead of SPX means you have to deal with early exercise and dividends.
Since you can't buy contracts too far out in time, so you have to sell, roll or exercise. In a tax advantaged account maybe that matters less. Was your proposed strategy to roll? If so, how far before expiry, and to what level?
> You'd have to pony up 2x to get the underlying index fund anyways, so you might as well just buy deep ITM calls (which right now are hovering at a premium of 3% for strike of 315$ on spy).
Over what duration? We need that to figure out the rough APR of the implied borrowing you're doing.
> +1 for European options, I forgot you can buy those on index funds...
On indexes not index funds! SPX option notional value is literally the S&P 500, in index points, times $100. They're big. XSP option notional value is basically the S&P 500, in index points, times $10.
> I thought margin / borrowing costs for future etfs is some ridiculous 8-12%. Pretty bad if you have no alpha except beta go up!
I was suggesting the underlying futures contract rather than a futures ETF. /ES is big, /MES is much smaller.
unyttigfjelltol 35 days ago [-]
... "permanently high plateau" and all that...
chongli 35 days ago [-]
You have to pay interest when you invest on margin and a margin call can wipe you out. Investing on margin is serious riverboat gambling, not retirement saving.
asdasdsddd 35 days ago [-]
I always see this "excuse". Our fund isn't focused on alpha; we minimize beta. It's just unclear to me whether this is shown out in the data.
ddmitriev 35 days ago [-]
I think they usually say that they are focused on alpha while minimizing beta, i.e. don't compare us to the S&P or other indices because we are market neutral. And in my experience, the large, old firms that I am personally familiar with do in fact have beta very close to 0 in their main funds, so on that front at least some firms do deliver.
This doesn't necessarily make the product a good idea even for people who can get an allocation, however. For example, because most (all?) market-neutral firms engage in active trading, a US UHNW person living in a high-tax state will generally have to pay around 50% of each year's gains in taxes. These taxes will have to be paid whether or not they did or were even allowed to withdraw any money from their investments that year, so a gain of let's say 12% becomes 6%, which may have to come out from some other source.
chii 35 days ago [-]
> have to pay around 50% of each year's gains in taxes.
> ...will have to be paid whether or not they did or were even allowed to withdraw any money from their investments that year
That's crazy.
I would've thought the hedge fund would be able to hide the capital gains tax (as they're a trader, and should be exempted from capital gains taxes), so you as an investor only pays capital gains tax when you withdraw.
This also implies that the investor doesn't get to carry forward capital losses, or use it to offset their own outside capital gains.
casercaramel144 35 days ago [-]
Anecdotally (can't say how I know), many firms did very well in the 2020-2021 Covid crash, also its quite cheap to say buy 50 million in far OTM puts to guard against black swan events. It's far more likely that a slow slide in SPY will show some Beta correlation than anything else.
barbarr 35 days ago [-]
Ok so in defense of their voronoi graphs, if they used a segmented bar or pie chart instead, you wouldn't be able to see the small quantities clearly, and if they used circles of different sizes, it would be easy to mistake the radii as the measured quantity instead of the area. Similar issue arises with lengths/widths if you use rectangles. Their visualization nudges you to compare areas which is a good feature imo.
thaumasiotes 35 days ago [-]
> and if they used circles of different sizes, it would be easy to mistake the radii as the measured quantity instead of the area
No, if the measured quantity is represented as the radius, everyone will assume it's the area, and you've designed a very bad graph. If the measured quantity is represented as the area, everyone will assume it's the area, and you're fine. The area is what you can see.
airstrike 35 days ago [-]
Just put regular columns next to each other.
fn-mote 35 days ago [-]
> it would be easy to mistake the radii as the measured quantity instead of the area
Humans perceive the area as the measured quantity even when radius is the intended, so this isn’t going to be a problem.
IncreasePosts 35 days ago [-]
Hedge funds aren't necessarily about getting max gains - they can be about decorrelating some of your investments (hence the hedge). So maybe buying SPY would have worked , but people with their money in hedge funds probably already have a bunch of investments correlated with SPY.
Terr_ 35 days ago [-]
> they can be about decorrelating some of your investments (hence the hedge).
As a tangential caution to readers: Remember that where you work is something you want to diversify for: Put a bit more into things that won't go bust around the same times you lose your job.
clove 35 days ago [-]
That's no longer true and hasn't been for a long time. While the name comes from that concept, the "hedge fund" is now just any fund marketed to accredited investors.
fallingknife 35 days ago [-]
I've seen plenty of attempts at cramming down multidimensional data into less dimensions, but this is the first time I've ever seen the opposite!
frenchtoast8 35 days ago [-]
Does this graph format have a name? Google isn’t turning up anything for me.
Yeah, I was about to post that it looked like some hybrid of a voronoi diagram and a treemap. More about those diagram types that can be combined in this manner:
Slow news day Bloomberg? Seriously, if you're investing in ANYTHING, and don't understand the prospectus or won't hire people to understand it for you, you're a fool.
They can charge whatever they want on these "pass-throughs".
The industry, just like post-return-management-clawbacks in the Tiger era (see Mallaby's "More Money Than God" https://amzn.com/dp/B003SNJZ3Y ) can get away with this precisely ONCE before "normalization" (as much as it's ever normalized) kicks in and these practices obviated.
neilv 35 days ago [-]
It's nice to see that hedge funds are still around. I thought all the bros had switched to tech.
tombert 35 days ago [-]
I've tried for the last several years to go the other direction: tech -> finance. I've sent thousands of applications to hundreds of trading and finance companies, and gotten zero bites in the last two years.
I am currently just assuming that there aren't as many finance jobs as there are jobs at big tech.
pkkkzip 35 days ago [-]
You just aren't as special or interesting as you think to them. Think about this, there are many finance focused graduates with several years of experience in that industry (buy-side im presuming from your comment) and being able to code isn't as special as SWE think it is.
This is another case of software devs thinking they can crack finance/trading because they know how to code. The myopia comes from the difference in culture and how risk is treated from tech organizations to finance.
Exception is if you have an advanced math/physics degree that will be useful in the domain of quant shops but I wouldn't recommend someone taking that route just because they want to make money.
There are lot of finance/trading jobs. I wouldn't waste time pursuing that field. Very few end up parachuting with a mid six digit figure salary even inside that industry and these are people with many years of finance specific experience.
tombert 35 days ago [-]
I don't really think I'm terribly special. As I said in sibling comments, I have been trying to break into more of the software side, not the quant stuff. I don't think I need to be special in order to try to break in, as long as I set my expectations to "it's a long shot" mode.
I do think that I could learn any level of quant if I really wanted to, but I would rather focus on the software stuff.
I have about half of a PhD in theoretical computer science, but that's not usually the "math" that's useful in finance, outside of the software side.
alephnerd 35 days ago [-]
> I have been trying to break into more of the software side, not the quant stuff
> I have about half of a PhD in theoretical computer science
There just aren't that many jobs in High Finance.
They can concentrate on hiring EECS/ECE/CS majors from MIT, Harvard, Stanford, UC Berkeley, UIUC, Columbia, and Princeton and call it a day.
But more critically, why would you even want to make that move? The RoI isn't that high if you aren't quant. You can make decently well working in most tech companies with a better WLB.
tombert 35 days ago [-]
> The RoI isn't that high if you aren't quant.
The postings I see on Selby Jennings (and their equivalents) seem to show a considerably higher salary than the BigCo's that I've worked at. At least the salary bands that are listed.
That's honestly a big reason, but I also just find the world of ultra-low-latency software pretty interesting.
alephnerd 34 days ago [-]
You'll also be expected to work 60-80 hour weeks.
You can earn the bottom end of those salary bands in West Coast Big Tech with much less hours worked (30-50).
> ultra-low-latency software pretty interesting
Then go into ML Infra. It's the same skillset and problem space (high performance computing), but better work hours and decent compensation.
tombert 34 days ago [-]
I've tried; I've done what everyone has done and sent applications to OpenAI; they don't call me back. I don't really want to work for an AI startup.
35 days ago [-]
anitil 35 days ago [-]
I have found (in other areas - supply chain, hardware, mech eng, finance) that it's much easier for people to move from <field> in to tech than the other way around. I'm not sure if that's because other fields require proof of capability (like a bachelors) whereas tech seems more welcoming to someone from other backgrounds.
tombert 35 days ago [-]
I think it's partly because "tech", as a career path, is relatively new, so its requirements aren't really as "solidified" as a lot of other fields.
moron4hire 35 days ago [-]
I'm just assuming nobody is actually responding to job applications in any industry anymore.
mhh__ 35 days ago [-]
There aren't.
fakedang 35 days ago [-]
I co-run a quant-driven prop shop. We never did and still don't do inbound recruiting, only outbound and referrals. It's the same with almost all quant shops now in the EU. I guess the US would be different, but only slightly - I guess every small quant shop does the same across geographies.
Also there are only a handful of big quant shops or hedgefunds actively seeking heavyweight quant guys.
The industry in general has moved to a strategy of doing more with less.
yieldcrv 35 days ago [-]
They are more pedigree focused
But cold applying isn't in vogue anyway
edm0nd 35 days ago [-]
You probably gotta have some wild AI and Quant skills on your resume to get any sort of response.
tombert 35 days ago [-]
I was trying to get into the more software-engineering side (e.g. stuff like what Jane Street advertises). I have plenty of experience at BigCo tech companies, but that doesn't appear to be enough.
I'm not bitter about it or anything, I'm not entitled to a yuppie finance job, but thus far no luck with it. There might be some magical configuration of my resume to make it stand out better to these companies, but I haven't found it yet if there is.
affyboi 35 days ago [-]
I don’t think it has to be that crazy. I only have a Bachelors in CS.
RhysU 35 days ago [-]
Find a recruiter.
tombert 35 days ago [-]
Easier said than done! When I've reached out to finance recruiters, even for stuff that I'm more or less qualified for, they pretty much always ignore me. One of them flat out told me that they will only work with people with a bachelors from a "Top 20" school, which I definitely do not.
Terretta 34 days ago [-]
We are in NYC area. More in profile.
tombert 34 days ago [-]
I emailed you.
blackeyeblitzar 35 days ago [-]
Aren’t hedge funds also tech companies these days? For example, isn’t the parent company of deep seek a hedge fund?
mjfl 35 days ago [-]
As someone who has worked in the industry: hedge funds are certainly parasites on our society, who make money not from wealthy clients (as is widely thought) but by managing government money through the social security system, union pension funds, college endowments, and sovereign wealth funds. They are a tool to redistribute billions of dollars of ordinary people's money into the pockets of an 'in-group' that then uses the money to buy political influence. I've watched this happen with my own eyes.
SideQuark 35 days ago [-]
Hedge funds don’t magically take your money any more than Santa Claus takes your money.
Pretty much none of your claims are true, unless those actors desire to be in a hedge fund (same as any place to invest). For example, social security is prevented by law from investing in anything except specially crafted Treasury bonds. Sovereign wealth funds are not “ordinary people’s money.” Union pensions are controlled by unions, and if they’re wise, are spread over many options. Same for college endowments.
It’s not hard to look up the sizes of these various asset categories and see your claims are mathematically impossible. I believe arithmetic over your eyes.
Don’t want one, invest elsewhere.
mjfl 35 days ago [-]
I was wrong about the social security system, which I must have gotten confused with some kind of pension system, like CALPERs, which used to invest in hedge funds before pulling out in 2014, but still allocates 40% of its portfolio into private equity [1], which may be worse than hedge funds for reasons I have discussed elsewhere. Everything else I said was true.
> Don’t want one, invest elsewhere.
Ordinary people have little control over what their pension funds invest in, and typically are not informed on these issues.
PE obtains higher returns than public funds simply because they have more options to invest in. They can put the cash into anything public invested funds can choose, AND a massive range of other projects.
CalPERS is not an ignorant investor. They see the results, and they allocate accordingly.
From your own link : "Over the past ten years, private equity has delivered an annualized return of 11.8%, compared to 8.9% for public equities, 2.4% for fixed income, and 7.7% for real assets. With traditional asset classes like bonds struggling to keep pace with inflation, CalPERS is looking to private equity to help them meet their long-term investment goals."
So yes, if you want worse returns, continue to believe unsupportable things. If you want to manage people's money, then choose well, and this is chosen well.
>Ordinary people have little control over what their pension funds invest in, and typically are not informed on these issues.
Which is good, because they also are not generally capable to manage their investments with as good as returns (otherwise every little mom and pop would beat PE, which is extremely far from the truth).
A google scholar search on PE returns versus public, top several hits that give numbers to the question:
https://openurl.ebsco.com/EPDB%3Agcd%3A7%3A13677223/detailv2...
"The model illuminates why, over the short term, private returns are superior to public ones, whereas over the long term, public and private returns are largely interchangeable after proper adjustments are made, resolving a long-standing conundrum"
"We study the performance of nearly 1,400 U.S. buyout and venture capital funds using a new data set from Burgiss. We find better buyout fund performance than previously documented—performance has consistently exceeded that of public markets. Outperformance versus the S&P 500 averages 20% to 27% over a fund's life and more than 3% annually. "
It's best not to invest with emotion, but with knowledge. Knowledge comes from analyzing markets and reading financial industry research, not repeating misinformed tropes.
mjfl 35 days ago [-]
I would argue the CalPERs does not know the return of its private equity investments because private equity is a recent phenomenon and one that locks up funds for 4-7 years, and I would predict that its realized returns will be disappointing. The financial literature is a crapshoot filled with selection bias that I wouldn't consult for anything. Rather, I will rely on my personal experience which is: private equity is a racket.
SideQuark 35 days ago [-]
I don’t understand why so many people in this thread keep posting trivially easy to check incorrect claims.
Private equity, in the modern form, has been used since before 1950. It’s trivial to check.
CalPERs provides detailed annual reports with returns broken out. No one runs a nearly half trillion fund and “does not know the return of its” component investments.
I’m glad you trust your limited, obviously emotionally driven, demonstrably lacking in knowledge at every comment in this thread, beliefs over market data. You demonstrate to others why so many people are not going to do well handling their own pensions compared to those using proper methods.
mjfl 35 days ago [-]
You misunderstood the meaning of what I said. Private equity has existed for a long time, but as an asset class has it had a huge boom for the past 20 years, gaining market share that it never had. This trend has been recognized by several media outlets. This article in Moonfare shows the private equity AUM has roughly tripled in the past 15 years and the number of private equity funds quadrupled between 2012 and 2021 [1]. This article by Citizens Bank documents the exponential rise in the number of companies owned by private equity while public has remained flat [2]. Another article discussing the exponential growth can be found here [3].
I guess I wasn't super clear, but anyone who's worked in the actual industry would have understood what I meant. And the fact that you didn't suggests to me that you don't have a lot of practical experience, or if you do you are stunningly aloof to the workplace discussions of your colleagues.
People who actually work in the industry would also be familiar with the fact that, yes in fact people who run funds with a half trillion under management can be stunningly unsophisticated and simply go with flashy new trends - like private equity! This has been commented on in several industry podcasts.
And again, your reference to academic studies in the financial field which, despite some people like AQR using them in their marketing, most practitioners seriously discount due to the severe problem of selection and survivorship bias, makes me believe you actually don't have any idea what you are talking about.
Actually you've said a lot of absurd things:
> Hedge funds don’t magically take your money any more than Santa Claus takes your money.
Again, people don't generally control what their pension fund invests in.
You completely miss the reason it's grown, and complain through repeated ignorance.
It's grown because it has proven itself, tends to outperform public equity, and provides asset diversification.
It would be dumb for any asset manager to ignore the evidence. I'd certainly fire any asset manager that trades on voodoo while ignoring such signal.
As to working in the industry, you should check my comment history. I've done modeling and fundamental algorithms for a huge range of industries, including new pricing algorithms I developed for investment houses. I have a PhD in math, degrees and grad work on CS and physics, taught graduate mathematical econ at a top 50 univ, and have done significant work and consulting for finance places. So I sorta do know about this.
As to your implication that you do work in this industry, you clearly don't. Just checking your comment history though shows you doing this level of uninformed commenting on topics and people correcting you just like here, going back a far as I checked.
So no, you have no idea about the industry any deeper than someone who read a blog post.
> This has been commented on in several industry podcasts.
OMG! Commented on in podcasts? Now I believe. For complaining that others can be unsophisticated, you cite this drivel as evidence, against the peer reviewed, track record researchers I posted above?
It figures. Keep cherry picking siloed low information sources to bolster your beliefs. I'll take widely sourced, properly done analysis.
Go ahead and post more. This has more than run it's course
mjfl 35 days ago [-]
[flagged]
JumpCrisscross 35 days ago [-]
> managing government money through the social security system
Do you mean the social safety net? Social security does not invest in hedge funds.
barumrho 35 days ago [-]
You are right about Social Security. It only holds Treasuries.
But, there are many other pension funds like teachers pension, government workers pensions, etc that manage working class money.
ceejayoz 35 days ago [-]
Well, not yet.
yieldcrv 35 days ago [-]
I’ve been satisfied with the hedge fund I was in
They didn't just do common stock equity trades, they sliced and diced money flows into and out of companies so interestingly
It felt like I had employed people to find, and create, deal flow
In bear markets theyd find companies that VCs all passed over, and created a pivot for them and extremely favorable capital terms to the hedge fund such as revenue splits before it hits the company’s books
When people say parasites, I see transactions that would never have happened
I see transactions I would never be able to get into the room to negotiate to happens
I also see how nobody knows anything. People see hedge fund movements in equity positions, but they wont see revenue splits, inventory splits for the fund to sell themselves
Its all about what you/your fund specifically does
energy123 35 days ago [-]
Why are you singling out hedge funds? The blame lies equally with all active fund management, as well as the investment managers (e.g. pension funds) who decide to allocate to them instead of to a passive tracker.
JumpCrisscross 35 days ago [-]
> blame lies equally with all active fund management, as well as the investment managers (e.g. pension funds) who decide to allocate to them instead of to a passive tracker
Except active management works for any metric other than long-term yield maximisation. (Most institutions have short-term needs, whether for liquidity or optics.)
bormaj 35 days ago [-]
As someone else in the industry, is it fair to categorize all HFs this way?
mjfl 35 days ago [-]
funds with high 'skin in the game' as in high amounts of manager net worth in the fund, tend to be an exception to what I'm saying.
jldugger 35 days ago [-]
Wait, which part of the social security system is investing in hedge funds?
Any advice to reform things? As individuals or as a collective?
mjfl 35 days ago [-]
(1) widespread education and awareness of this phenomenon, (2) put in restrictions on large institutions i.e. the government, unions, universities so that they only invest in funds with 'low-fee' structures and hire professional risk management at the institution-level that hedge risks using more standard methods like mixing bonds and equities and cash. Ban large institutions from investing in private equity, which is a high fee structure built to hide losses over long term periods.
JumpCrisscross 35 days ago [-]
I have invested in hedge funds as an individual. Your proposals would be great for me; less competition. I’m sceptical of the public benefits, though there is absolutely a political bloc who will like the optics of banning public investments in HFs and PE.
> private equity, which is a high fee structure built to hide losses over long term periods
Empirically false.
The problem with PE is the same as HFs: fees and dispersion of outcomes.
mjfl 35 days ago [-]
by all means, keep letting those charlatans take your money.
Are you denying that private equity avoids reporting standards that are mandated for public companies?
JumpCrisscross 35 days ago [-]
> private equity avoids reporting standards that are mandated for public companies?
So do startups and small businesses. I’ve made money in both (as well as hedge funds).
Good investments aren’t measured by consultant spam. I’d be furious if my managers burned my money on e.g. commissioning boiler plate risk factors.
mjfl 35 days ago [-]
private equities and startups/small businesses are fundamentally different in terms of the 'skin in the game' that startup founders and small business owners have in their business. They've typically invested themselves significant parts of their lives into their businesses. The same cannot be said of private equity funds, and you should know better.
JumpCrisscross 35 days ago [-]
> terms of the 'skin in the game' that startup founders
I’ve done a startup. My skin in the game was significant, but I was less dependent on the outcome of the startup than I was keeping my job earlier in my career.
In any case, fraudsters also have lots of skin in the game. This argument is irrelevant to the irrelevance of public reporting requirements, or the empirical track record of private equity for LPs.
psytrancefan 35 days ago [-]
How about mind your own business?
The main problem to me is everyone wants to tell everyone else what to do "for the good of society" but over my lifetime this has been a slow acting cultural poison.
Less than 20 years ago it cost me $7 a trade for one side and that was the cheap revolutionary price for the retail investor. Today it cost me ZERO. That is because of hedge funds. I doubt this will last forever because someone will come along and "fix" what is not broken "for the good of society".
ldjkfkdsjnv 35 days ago [-]
Yeah places like PIMCO are basically stealing from pension funds through a bunch of complicated financial engineering. Some of the assets they trade arent liquid, theres no consensus on fair price. And so a bunch of funny business goes on
bko 35 days ago [-]
> by managing government money through the social security system, union pension funds, college endowments, and sovereign wealth funds
Why don't you target that anger and contempt to the organizations willfully giving money to these organizations?
"Social security system is a parasite on society, who steals taxpayers money and throws it away in inefficient vehicles evidence over decades that tells us that their investments aren't outperfoming index funds"
JumpCrisscross 35 days ago [-]
> Why don't you target that anger and contempt to the organizations willfully giving money to these organizations?
This happens from time to time. Most recently, in pensions withdrawing from private equity. It’s historically come to bite when these managers hit a bout of volatility. Put simply, portfolio theory is incredibly robust.
The question isn’t why hedge funds, but why does it keep paying so well?
bko 35 days ago [-]
Why can hedge funds negotiate such high fees despite lackluster performance?
You answered it in the prior sentence: portfolio theory is incredibly robust. They (claim) to provide diversified return. The idea is that although they may not provide a net return comparable to low cost equity ETFs, they provide diversified return. And portfolio theory tells us lower yielding assets can actually increase your portfolio's risk-adjusted return, as long as it's not perfectly correlated with your existing investments.
Whether this plays out in practice is a different story, but that's the idea and selling point.
JumpCrisscross 35 days ago [-]
> Why can hedge funds negotiate such high fees despite lackluster performance?
As you point out, what counts as performance varies. Magnitude of net returns is important. But by analogy, you could get massive net returns betting on the Powerball.
anotherhue 35 days ago [-]
Surely there isn't a shortage of competition? Does everyone just want in on the big names?
tmpz22 35 days ago [-]
Old people who don't watch their assets, very rich people who don't watch their assets. Maybe we should build a protection mechanism for it - maybe call it the Consumer Finance Protection Bureau?
and is irrelevant in general since its just been nuked from orbit
missedthecue 35 days ago [-]
Does a nuke from orbit generate more destruction than a suborbital nuke?
science4sail 34 days ago [-]
Probably similar given the same yield unless the bomber has some way to utilize the kinetic energy of the orbit.
The difference though is that a nuking from orbit has less chance of retaliation since the aggressor is no longer on the same planet (unless the victim has ASAT weapons).
wslh 35 days ago [-]
Automated protection tools could also help in monitoring hedge funds, similar to how apps like BillGuard[1] worked for personal finance. Many investors don’t actively track their holdings the way they do with credit cards.
Yes and what would be its job? Making sure that rich people have lawyers who read contracts? That would probably suffice. I don't have much sympathy for people who have enough money to use hedge funds and complain about the terms of their completely voluntary transaction.
fallingknife 35 days ago [-]
Most investors who invest in these funds are institutions and the ones who are (extremely rich) individuals are very unlikely to not be paying attention.
mhh__ 35 days ago [-]
The top hedge funds that can realistically promise [0] excellent returns are basically all capacity constrained AFAICT
Either that or they've switched business model to mostly making money on the management fee. It's easier to grow the assets than the returns.
[0] If you can get money into one of the top multi-managers, in peacetime you are basically looking at somewhere between a nice and very good return every year. Where peacetime could well include a big bear market in stocks e.g. Millennium made 35% in 2022 despite a big draw down in the SP500.
This of course isn't magic, illiquidity, big spikes in (say) funding costs, or just foolishness can still kill them.
roncesvalles 35 days ago [-]
>It's easier to grow the assets than the returns.
A certain famous Italian gentleman had the same realization.
JumpCrisscross 35 days ago [-]
> Does everyone just want in on the big names?
Yes. Generating consistent returns is hard. Proving you can do it is harder. Investors may be rationally willing to cede most of the upside in exchange for less exposure to the downside. (Part of the problem is the political pressure on public fund managers to avoid losses.)
Terretta 34 days ago [-]
Investing edge comes from hard work.
These are not single strategy hedge funds. The places mentioned are doing something different not inexpensively duplicated, that returns a different investment profile.
Yeah, I'm not sure who is being scammed. Myself, I have never heard of any of these — Citadel, etc.
yieldcrv 35 days ago [-]
I agree that's a problem to be discerning about - and it may be impossible to be discerning about - I also think people are looking for any reason to just "index" and purchase the S&P 500 or VOO ETFs
like A) from being ineligible to be in hedge funds, and then B) to justify their fear
but hedge fund returns are not able to really be aggregated so simply, there have been attempts, I can pull up whatever article you're probably thinking about, but in real life if you join a hedge fund, you aren't joining a portfolio, your capital is applied to new positions.
so every subscription to a hedge fund has unique performance. only people that joined at the exact same time with the same amount of capital have a chance of having the same experience.
I think that reality muddies most of the discussion about the concept of hedge funds and investor returns.
You should definitely look for the strategy you like, followed by liking the people running the fund.
ddmitriev 35 days ago [-]
This does not sound right. Maybe venture capital funds work this way? (I wouldn't know about them.)
But with regular hedge funds, you are joining a portfolio and you do get the return even on the positions that were in place at the time you invested. The only differences between investors that may affect the return that is allocated to them are a) their share classes, which may affect investment terms such as fees or withdrawal rights, and b) their respective high watermarks, which may affect the payment of performance fees. Everything else within the same fund will be the same.
yieldcrv 35 days ago [-]
Sidepockets throw that difference off
thrill 35 days ago [-]
Hedge funds are entirely voluntary transactions on the part of participants.
chris_va 35 days ago [-]
Doesn't mean said participants can't get together and complain about it to try and improve market liquidity
usefulcat 35 days ago [-]
How is market liquidity relevant here?
chris_va 34 days ago [-]
HFs are not very liquid, which makes it easier for managers to charge fees without losing their book of business.
JamesVU2000 32 days ago [-]
Hedges only make sense if the cure is not worse than the disease. Portfolios are littered with bad hedges
monkeydust 35 days ago [-]
I think a few years ago it was all about longer lock-ins, now pass-throughs ...i mean come on its about as close to a setup as you can get!
randomcarbloke 35 days ago [-]
whatever happened to 2 and 20?
AutistiCoder 35 days ago [-]
[flagged]
mmlb 35 days ago [-]
No script element zapper can remove it, easy peasy.
If they can charge large amount of fees and still stay competitive, then good on them, right?
The whole point of a hedge fund is for you to let someone else do the worrying. So the market is decidedly inefficient.
it's been many decades since the existence of statistical analysis of hedge funds (as an aggregate) that demonstrates their lack of edge over benchmark passive index funds.
Some hedge funds would still out-perform. Most don't, and those who do tend to charge fees up to their level of edge, and leave only index-benchmark returns for their investors.
If you don't heed this evidence now, you deserve to lose money to these funds.
Except, also, you don't actually ever see the tickets.
Not quite. It also matters how and when returns are generated. Some vol funds make 1–3% a year on average, but they still manage billions because when markets crash, they (presumably) crush it — and that’s when investors need them the most
2. I thought management fees were supposed to pay for comp?
3. Buying SPY wins again?
4. I don't really care about rich people getting ripped off, but I wonder if any of my money leaks into these funds
Many institutions and HNW and UHNW individuals prioritize consistency over absolute growth. They would rather make 6-8% a year and reduce downside risk than optimize for gains. Multi-strat funds like this one are catering to people who want that product.
[0] - https://citeseerx.ist.psu.edu/document?repid=rep1&type=pdf&d...
A 50% market crash would be brutal even without leverage, but at least no one would force you to sell.
If you really want to do 2x lever its probably best to just buy 6 month or 1 yr dated ITM calls. They're quite cheap and very liquid on SPY.
The reason is exactly what you described actually. If the underlying exhibits positive momentum, generally trending up instead of oscillating back and forth, the daily balancing works for you instead of against you and the ETF outperforms the target multiple of the underlying.
Yes, if your S&P returns over 3 days are +10%, -10%, +10% then SPY is up 8.9% while UPRO is up 18% (2X, not 3X).
On the other hand if your S&P returns over 3 days are +10%, +10%, +10% then SPY is up 33% while UPRO is up 120% (4X, not 3X).
The big levered ETFs have reasonable volume and limited slippage for any volume retail investors would be trading. Fees are like 0.9% which all things considered isn't bad - given their vast outperformance.
I'm not saying go all in on these, what I'm saying is that your analysis of the levered funds is missing some important details which show up on a quick backtest. If you understand the products and what bet you're making with them, they can be quite reasonable to hold long term - despite popular misconceptions.
> If you really want to do 2x lever its probably best to just buy 6 month or 1 yr dated ITM calls. They're quite cheap and very liquid on SPY.
Respectfully those are much more expensive and if you're near the money quite non-linear. You're going to have to pony up pretty close to the price of just buying the index again to get 2X exposure if you're deep ITM. Near the money you'll need several options to get 2X - and you'll need to delta rebalance. You'll also get eaten alive by theta decay.
To avoid having to pony up a ton of collateral or get eaten by theta, you may as well just buy more SPY on margin - or save yourself the hassle and get an /ES=F or /MES=F.
If you insist on trying to trade the S&P 500 with options (especially if your expiration is only 6-12m away) use SPX or XSP -- not SPY. They're cash-settled European index options, so no early exercise to worry about, no dividends to worry about and they get 60/40 capital gains treatment no matter how long you hold them for.
I'm no expert. But it seems like writing out of the money options: it's "free money" until the market suddenly moves against you, and you get your head chopped off. When that inevitably happens, the loss has a good chance of more than wiping out all your prior gains.
I agree it is taking on more risk, although potentially less than with out-of-the-money options. To lose 99% of spuu’s value the sp500 would have to drop 50% in one day, or 35% for three days in a row, or 20% for nine days in a row, etc with infinite similar cases. It’s not a rigorous argument, but I think those examples give a feel for how common/rare that occurrence would be — I think these particular cases have never happened since the sp500 started.
But it’s certainly riskier-than-traditional in either case
Which is exceedingly unlikely because of the circuit breakers. A level 3 breaker is triggered after a 20% decline and halts trading for the remainder of the day.
Not sure it would've gone so well had it happened in 2007
>And yet UPRO (3X SPY) has significantly outperformed 3X the S&P 500 since inception (since June 2009 UPRO is +8000% vs SPY +700%.
Isn't this just hindsight bias? You market time to right after 2008 crash. Those two dates are probably the best possible because from 2009->2020 we had an 11 year uninterrupted bull run. If you bought in 2020-2021 you would have been screwed for 3 years at the least. If you bought 10x levered out of the money spy calls every 6 months and roll the winnings since 2009 you probably can get even higher, but probably you don't want to do that.
>Respectfully those are much more expensive and if you're near the money quite non-linear. You're going to have to pony up pretty close to the price of just buying the index again to get 2X exposure if you're deep ITM. Near the money you'll need several options to get 2X - and you'll need to delta rebalance. You'll also get eaten alive by theta decay.
Isn't this for retirement saving? IE where we have big chunks of cash we won't see for 20 years, so you can buy like 2 contracts and its good enough. You'd have to pony up 2x to get the underlying index fund anyways, so you might as well just buy deep ITM calls (which right now are hovering at a premium of 3% for strike of 315$ on spy).
+1 for European options, I forgot you can buy those on index funds, is the liquidity enough on deep OTM calls to be worth it though?
>To avoid having to pony up a ton of collateral or get eaten by theta, you may as well just buy more SPY on margin - or save yourself the hassle and get an /ES=F or /MES=F. I thought margin / borrowing costs for future etfs is some ridiculous 8-12%. Pretty bad if you have no alpha except beta go up!
Yes absolutely, I just picked when the product launched.
I wanted to point out to parent that the daily balancing isn't just a bad thing, it can be a good thing - it depends on how the underlying performs. You are right it cuts both ways though and you may have to sit in them for years to break even. Note UPRO actually somehow pays a dividend.
> If you bought 10x levered out of the money spy calls every 6 months and roll the winnings since 2009 you probably can get even higher, but probably you don't want to do that.
What do you mean by 10X leveraged calls? Like 10-delta? What was the spread between implied and realized volatility over that period? Ultimately your options outcomes are really based on realized volatility exceeding implied volatility (otherwise you break even or lose).
> Isn't this for retirement saving? IE where we have big chunks of cash we won't see for 20 years, so you can buy like 2 contracts and its good enough.
Parent said contracts that expire in 6 or 12 months on SPY. That means short term capital gains at expiry, and using SPY instead of SPX means you have to deal with early exercise and dividends.
Since you can't buy contracts too far out in time, so you have to sell, roll or exercise. In a tax advantaged account maybe that matters less. Was your proposed strategy to roll? If so, how far before expiry, and to what level?
> You'd have to pony up 2x to get the underlying index fund anyways, so you might as well just buy deep ITM calls (which right now are hovering at a premium of 3% for strike of 315$ on spy).
Over what duration? We need that to figure out the rough APR of the implied borrowing you're doing.
> +1 for European options, I forgot you can buy those on index funds...
On indexes not index funds! SPX option notional value is literally the S&P 500, in index points, times $100. They're big. XSP option notional value is basically the S&P 500, in index points, times $10.
> I thought margin / borrowing costs for future etfs is some ridiculous 8-12%. Pretty bad if you have no alpha except beta go up!
I was suggesting the underlying futures contract rather than a futures ETF. /ES is big, /MES is much smaller.
This doesn't necessarily make the product a good idea even for people who can get an allocation, however. For example, because most (all?) market-neutral firms engage in active trading, a US UHNW person living in a high-tax state will generally have to pay around 50% of each year's gains in taxes. These taxes will have to be paid whether or not they did or were even allowed to withdraw any money from their investments that year, so a gain of let's say 12% becomes 6%, which may have to come out from some other source.
> ...will have to be paid whether or not they did or were even allowed to withdraw any money from their investments that year
That's crazy.
I would've thought the hedge fund would be able to hide the capital gains tax (as they're a trader, and should be exempted from capital gains taxes), so you as an investor only pays capital gains tax when you withdraw.
This also implies that the investor doesn't get to carry forward capital losses, or use it to offset their own outside capital gains.
No, if the measured quantity is represented as the radius, everyone will assume it's the area, and you've designed a very bad graph. If the measured quantity is represented as the area, everyone will assume it's the area, and you're fine. The area is what you can see.
Humans perceive the area as the measured quantity even when radius is the intended, so this isn’t going to be a problem.
As a tangential caution to readers: Remember that where you work is something you want to diversify for: Put a bit more into things that won't go bust around the same times you lose your job.
https://www.amcharts.com/voronoi-treemap/
https://en.wikipedia.org/wiki/Voronoi_diagram
https://en.wikipedia.org/wiki/Treemapping
They can charge whatever they want on these "pass-throughs".
The industry, just like post-return-management-clawbacks in the Tiger era (see Mallaby's "More Money Than God" https://amzn.com/dp/B003SNJZ3Y ) can get away with this precisely ONCE before "normalization" (as much as it's ever normalized) kicks in and these practices obviated.
I am currently just assuming that there aren't as many finance jobs as there are jobs at big tech.
This is another case of software devs thinking they can crack finance/trading because they know how to code. The myopia comes from the difference in culture and how risk is treated from tech organizations to finance.
Exception is if you have an advanced math/physics degree that will be useful in the domain of quant shops but I wouldn't recommend someone taking that route just because they want to make money.
There are lot of finance/trading jobs. I wouldn't waste time pursuing that field. Very few end up parachuting with a mid six digit figure salary even inside that industry and these are people with many years of finance specific experience.
I do think that I could learn any level of quant if I really wanted to, but I would rather focus on the software stuff.
I have about half of a PhD in theoretical computer science, but that's not usually the "math" that's useful in finance, outside of the software side.
> I have about half of a PhD in theoretical computer science
There just aren't that many jobs in High Finance.
They can concentrate on hiring EECS/ECE/CS majors from MIT, Harvard, Stanford, UC Berkeley, UIUC, Columbia, and Princeton and call it a day.
But more critically, why would you even want to make that move? The RoI isn't that high if you aren't quant. You can make decently well working in most tech companies with a better WLB.
The postings I see on Selby Jennings (and their equivalents) seem to show a considerably higher salary than the BigCo's that I've worked at. At least the salary bands that are listed.
That's honestly a big reason, but I also just find the world of ultra-low-latency software pretty interesting.
You can earn the bottom end of those salary bands in West Coast Big Tech with much less hours worked (30-50).
> ultra-low-latency software pretty interesting
Then go into ML Infra. It's the same skillset and problem space (high performance computing), but better work hours and decent compensation.
Also there are only a handful of big quant shops or hedgefunds actively seeking heavyweight quant guys.
The industry in general has moved to a strategy of doing more with less.
But cold applying isn't in vogue anyway
I'm not bitter about it or anything, I'm not entitled to a yuppie finance job, but thus far no luck with it. There might be some magical configuration of my resume to make it stand out better to these companies, but I haven't found it yet if there is.
Pretty much none of your claims are true, unless those actors desire to be in a hedge fund (same as any place to invest). For example, social security is prevented by law from investing in anything except specially crafted Treasury bonds. Sovereign wealth funds are not “ordinary people’s money.” Union pensions are controlled by unions, and if they’re wise, are spread over many options. Same for college endowments.
It’s not hard to look up the sizes of these various asset categories and see your claims are mathematically impossible. I believe arithmetic over your eyes.
Don’t want one, invest elsewhere.
> Don’t want one, invest elsewhere.
Ordinary people have little control over what their pension funds invest in, and typically are not informed on these issues.
[1] https://raoglobal.org/insights/calpers-goes-big-on-private-e...
PE obtains higher returns than public funds simply because they have more options to invest in. They can put the cash into anything public invested funds can choose, AND a massive range of other projects.
CalPERS is not an ignorant investor. They see the results, and they allocate accordingly.
From your own link : "Over the past ten years, private equity has delivered an annualized return of 11.8%, compared to 8.9% for public equities, 2.4% for fixed income, and 7.7% for real assets. With traditional asset classes like bonds struggling to keep pace with inflation, CalPERS is looking to private equity to help them meet their long-term investment goals."
So yes, if you want worse returns, continue to believe unsupportable things. If you want to manage people's money, then choose well, and this is chosen well.
>Ordinary people have little control over what their pension funds invest in, and typically are not informed on these issues.
Which is good, because they also are not generally capable to manage their investments with as good as returns (otherwise every little mom and pop would beat PE, which is extremely far from the truth).
A google scholar search on PE returns versus public, top several hits that give numbers to the question:
https://www.joim.com/wp-content/uploads/emember/downloads/P0... - PE outperforms
https://openurl.ebsco.com/EPDB%3Agcd%3A7%3A13677223/detailv2... "The model illuminates why, over the short term, private returns are superior to public ones, whereas over the long term, public and private returns are largely interchangeable after proper adjustments are made, resolving a long-standing conundrum"
https://onlinelibrary.wiley.com/doi/abs/10.1111/jofi.12154
"We study the performance of nearly 1,400 U.S. buyout and venture capital funds using a new data set from Burgiss. We find better buyout fund performance than previously documented—performance has consistently exceeded that of public markets. Outperformance versus the S&P 500 averages 20% to 27% over a fund's life and more than 3% annually. "
It's best not to invest with emotion, but with knowledge. Knowledge comes from analyzing markets and reading financial industry research, not repeating misinformed tropes.
Private equity, in the modern form, has been used since before 1950. It’s trivial to check.
CalPERs provides detailed annual reports with returns broken out. No one runs a nearly half trillion fund and “does not know the return of its” component investments.
I’m glad you trust your limited, obviously emotionally driven, demonstrably lacking in knowledge at every comment in this thread, beliefs over market data. You demonstrate to others why so many people are not going to do well handling their own pensions compared to those using proper methods.
I guess I wasn't super clear, but anyone who's worked in the actual industry would have understood what I meant. And the fact that you didn't suggests to me that you don't have a lot of practical experience, or if you do you are stunningly aloof to the workplace discussions of your colleagues.
People who actually work in the industry would also be familiar with the fact that, yes in fact people who run funds with a half trillion under management can be stunningly unsophisticated and simply go with flashy new trends - like private equity! This has been commented on in several industry podcasts.
And again, your reference to academic studies in the financial field which, despite some people like AQR using them in their marketing, most practitioners seriously discount due to the severe problem of selection and survivorship bias, makes me believe you actually don't have any idea what you are talking about.
Actually you've said a lot of absurd things:
> Hedge funds don’t magically take your money any more than Santa Claus takes your money.
Again, people don't generally control what their pension fund invests in.
[1] https://www.moonfare.com/pe-masterclass/private-equity-marke...
[2] https://www.citizensbank.com/corporate-finance/insights/priv...
[3] https://www.dakota.com/resources/blog/private-markets-on-the...
It's grown because it has proven itself, tends to outperform public equity, and provides asset diversification.
It would be dumb for any asset manager to ignore the evidence. I'd certainly fire any asset manager that trades on voodoo while ignoring such signal.
As to working in the industry, you should check my comment history. I've done modeling and fundamental algorithms for a huge range of industries, including new pricing algorithms I developed for investment houses. I have a PhD in math, degrees and grad work on CS and physics, taught graduate mathematical econ at a top 50 univ, and have done significant work and consulting for finance places. So I sorta do know about this.
As to your implication that you do work in this industry, you clearly don't. Just checking your comment history though shows you doing this level of uninformed commenting on topics and people correcting you just like here, going back a far as I checked.
So no, you have no idea about the industry any deeper than someone who read a blog post.
> This has been commented on in several industry podcasts.
OMG! Commented on in podcasts? Now I believe. For complaining that others can be unsophisticated, you cite this drivel as evidence, against the peer reviewed, track record researchers I posted above?
It figures. Keep cherry picking siloed low information sources to bolster your beliefs. I'll take widely sourced, properly done analysis.
Go ahead and post more. This has more than run it's course
Do you mean the social safety net? Social security does not invest in hedge funds.
They didn't just do common stock equity trades, they sliced and diced money flows into and out of companies so interestingly
It felt like I had employed people to find, and create, deal flow
In bear markets theyd find companies that VCs all passed over, and created a pivot for them and extremely favorable capital terms to the hedge fund such as revenue splits before it hits the company’s books
When people say parasites, I see transactions that would never have happened
I see transactions I would never be able to get into the room to negotiate to happens
I also see how nobody knows anything. People see hedge fund movements in equity positions, but they wont see revenue splits, inventory splits for the fund to sell themselves
Its all about what you/your fund specifically does
Except active management works for any metric other than long-term yield maximisation. (Most institutions have short-term needs, whether for liquidity or optics.)
> private equity, which is a high fee structure built to hide losses over long term periods
Empirically false.
The problem with PE is the same as HFs: fees and dispersion of outcomes.
Are you denying that private equity avoids reporting standards that are mandated for public companies?
So do startups and small businesses. I’ve made money in both (as well as hedge funds).
Good investments aren’t measured by consultant spam. I’d be furious if my managers burned my money on e.g. commissioning boiler plate risk factors.
I’ve done a startup. My skin in the game was significant, but I was less dependent on the outcome of the startup than I was keeping my job earlier in my career.
In any case, fraudsters also have lots of skin in the game. This argument is irrelevant to the irrelevance of public reporting requirements, or the empirical track record of private equity for LPs.
The main problem to me is everyone wants to tell everyone else what to do "for the good of society" but over my lifetime this has been a slow acting cultural poison.
Less than 20 years ago it cost me $7 a trade for one side and that was the cheap revolutionary price for the retail investor. Today it cost me ZERO. That is because of hedge funds. I doubt this will last forever because someone will come along and "fix" what is not broken "for the good of society".
Why don't you target that anger and contempt to the organizations willfully giving money to these organizations?
"Social security system is a parasite on society, who steals taxpayers money and throws it away in inefficient vehicles evidence over decades that tells us that their investments aren't outperfoming index funds"
This happens from time to time. Most recently, in pensions withdrawing from private equity. It’s historically come to bite when these managers hit a bout of volatility. Put simply, portfolio theory is incredibly robust.
The question isn’t why hedge funds, but why does it keep paying so well?
You answered it in the prior sentence: portfolio theory is incredibly robust. They (claim) to provide diversified return. The idea is that although they may not provide a net return comparable to low cost equity ETFs, they provide diversified return. And portfolio theory tells us lower yielding assets can actually increase your portfolio's risk-adjusted return, as long as it's not perfectly correlated with your existing investments.
Whether this plays out in practice is a different story, but that's the idea and selling point.
As you point out, what counts as performance varies. Magnitude of net returns is important. But by analogy, you could get massive net returns betting on the Powerball.
DOGE-Backed Halt at CFPB Comes Amid Musk's Plans for 'X' Digital Wallet - https://news.ycombinator.com/item?id=43003636
And
The biggest microcode attack in our history is underway - https://news.ycombinator.com/item?id=43001730
The difference though is that a nuking from orbit has less chance of retaliation since the aggressor is no longer on the same planet (unless the victim has ASAT weapons).
[1] https://en.wikipedia.org/wiki/BillGuard
Either that or they've switched business model to mostly making money on the management fee. It's easier to grow the assets than the returns.
[0] If you can get money into one of the top multi-managers, in peacetime you are basically looking at somewhere between a nice and very good return every year. Where peacetime could well include a big bear market in stocks e.g. Millennium made 35% in 2022 despite a big draw down in the SP500.
This of course isn't magic, illiquidity, big spikes in (say) funding costs, or just foolishness can still kill them.
A certain famous Italian gentleman had the same realization.
Yes. Generating consistent returns is hard. Proving you can do it is harder. Investors may be rationally willing to cede most of the upside in exchange for less exposure to the downside. (Part of the problem is the political pressure on public fund managers to avoid losses.)
These are not single strategy hedge funds. The places mentioned are doing something different not inexpensively duplicated, that returns a different investment profile.
Random Google: https://www.eatonvance.com/insights/articles/how-multi-manag...
like A) from being ineligible to be in hedge funds, and then B) to justify their fear
but hedge fund returns are not able to really be aggregated so simply, there have been attempts, I can pull up whatever article you're probably thinking about, but in real life if you join a hedge fund, you aren't joining a portfolio, your capital is applied to new positions.
so every subscription to a hedge fund has unique performance. only people that joined at the exact same time with the same amount of capital have a chance of having the same experience.
I think that reality muddies most of the discussion about the concept of hedge funds and investor returns.
You should definitely look for the strategy you like, followed by liking the people running the fund.
But with regular hedge funds, you are joining a portfolio and you do get the return even on the positions that were in place at the time you invested. The only differences between investors that may affect the return that is allocated to them are a) their share classes, which may affect investment terms such as fees or withdrawal rights, and b) their respective high watermarks, which may affect the payment of performance fees. Everything else within the same fund will be the same.