Quote:
Originally Posted by Onlydo2days
Agree w/ this but I gotta think guys like Paulson, Lasry, Ackman and the big hedge fund guys worth billions would be favs over the index. I guess it is more risk than reward to take Buffett up on the bet. If you win you just did what everyone would expect you to do and if you lose you look like a jackass.
I've always understood it that hedge funds tend to get their best returns vs the index in bear markets. A market like we have had since the bet was made would be tough for them to outperform.
There are definitely managers who beat the market. But they also have to beat their fees, and that makes it a bit harder to pick winners, especially when the best sometimes charge even more than 2/20. And then they have to be available for investment for a funds of funds manager, and some simply aren't. Do you think Paulson, Lasry, Ackman are all accepting new funds all the time?
And then finally the results of the funds you were able to pick, have to beat the S&P after you deduct your "Funds of Funds brilliant funds picker" fees.
Quote:
Originally Posted by grizy
This is bad bet for Buffet.
Even assuming the classic CAPM model with only systematic risk as beta (piles of data that the market pays for more betas, liquidity is high on that list), all you have to do to be a favorite in this bet is to find high beta hedge funds.
This is a bad bet that he's pretty much won two thirds of the way through?
When you start "assuming the classic CAPM model" you might as well start "assuming astrology works". CAPM is built on a foundation of sand, when you conflate beta with "risk" your theory has about as much relevance to good stock picking as astrology does.
Your other mistake is nowhere do you include the impact of fees. No one is saying that there aren't managers who beat the market, many do. Over longer periods it's much harder to find managers who beat the market after their fees, and it's extremely hard to separate those who outperformed via luck from those who outperformed by possessing a repeatable skill. Hint: CAPM won't help you determine skill.
And again, even if you are a fund of funds manager who does have "skill" in picking only managers with solid skills at beating the market from your limited pool of funds open for investment, they have to beat the market by more than your fees. And we know your fees aren't cheap.
http://longbets.org/362/
Every hedge fund starts every year 2% or more behind the market because of their operating fees, in a market with a gross long term expectation of 8 or 9% annual returns.
If your fund of funds charges 1 & 5, and the underlying funds charge only 2 & 20, it starts every year 3% behind. It's like giving up a third of your potential gains immediately.
Worse are good years. If the market is up 30% this year and your hedge funds just match it, now you lose another 7.5% to fees, and finish 10.5% behind the market. To beat the market in a 30% up year using a hedge fund, it needs to have a 40% year. To beat it with a FoFs, the underlying hedge funds have to average over 46%!
And of course hedge funds do better in bear markets. it's the one time they aren't raping their investors taking additional profit share fees! a FoF down 10% vs a market down 20% is now up 7% relatively.
So the hedgies are praying for a down market to have any chance in this bet, but even if the next 3 years are down years they have to beat the market by 9% to cover fees + another 40% to catch up from behind. God forbid they get two down years followed by an up year that adds another mountain of fees to overcome.
Hmm, a collection of funds beating a down market by close to 50%? Sounds like something only a FoF sales manager would believe.