I guess my point is that most players you have *attempted* to be poker pros (have read a few books, studied a bit, etc) do not succeed in becoming one, but most players who have played for years and log hours and hours of casino time (the majority of seats as you suggest) are indeed winners.

By analogy, many hedge funds fail (mostly smaller and newer ones) but the ones who have the vast majority of hedge fund assets (the ones listed in the HSBC report for example) are typically winners and verifiably so.

Hi Hedgefunguy:

I was going to follow this up, but you may have just answered what I was going to ask. But reading the discussion in this thread, it appears to me that many readers are not distinguishing between hedge fund size. That is a large fund should count more than a small fund. Thus it could be possible for most funds to do poorly yet the industry as a whole be doing well. Any comments?

Best wishes,
Mason

Yes, exactly and for the same reason that if you looked at the profitability of every player who has tried to be a poker pro, it is likely negative while those pros who have been playing at the top levels for years are almost surely positive expectation.

It seems many people (including academics) have not seen this clearly.

In an effort to show that it is possible to outperform even in a highly competitive market, I have used (yet another..) the example of Billy Beane and the Oakland A's and the outperformance he has generated (a clearly winning record) with a well below average player budget. I have offered many people the bet that despite the fact that the A's are likely to still be near the bottom in salary going forward, I will bet they will have a winning record over say the next 5 year period. No one has taken me up on that bet. Revealed preference suggests, therefore, that people believe that "alpha", or outperformance, is possible in that context.

I would make a similar bet about the return per unit of risk (information ratio) **after fees** of many hedge funds, even if it the case (which I am not conceding, but might possibly be true) that the "average" hedge fund does not outperform.

Great thread!

I am shocked by the numbers.

Oscar

I believe he is speaking of moderately high games only.

There is a sub plot to this point though, which is if we consider how many will be winning players within x time period in the future.

As poker's brutal arms race intensifies, very few survive as long term, high stake winners (just think how brutal the player turnover has been at the nosebleeds even in the last two years). The answer to the question 'how many people in this card room will be profitable over the next ten years?' has a radically different answer, and one extremely relevant and important to a backer/investor.

Poker comparison isn't exactly fair as it is a zero sum game. For every merger arb trader that wins, there isn't a merger arb trader that loses. Many opportunities in trading are positive sum.

Poker is typically negative sum

Thanks for doing this, hedgefundguy. I know next to nothing about hedge funds, so this thread has been very informative for me.

I was wondering what your thoughts were on the so called "Robin Hood" tax, or a tax on trades. The largest, but least complex, proposal I've seen is a .03% tax on all trades (another more complex version is explained here). Proponents claim the tax will reduce both risky speculation and high frequency trading, while not having much of an effect on smaller investors. Do you agree? Do you think such a tax would have any unintended consequences?

Pigouvian taxes like this one seem like good ideas to me, but I'm interested in hearing what someone, who I'm assuming is on the other side, thinks about this.

Our turnover is not that high, so the cost of this to us would be real but not crushing.

I think real providers of liquidity in markets are valuable and should be rewarded, not punished. I think, in most cases, high frequency traders do not fit as true liquidity providers and therefore are negative sum for society (to some extent). Spending real economic resources to build faster cables to exchanges seems suboptimal.

So this tax would reduce/eliminate HFT at the cost of making markets less liquid and higher transaction costs. My guess this is slightly bad for society, but not likely a hugely meaningful impact on GDP either way.

Whether this tax is better or worse than other ones is not clear to me. All taxes impose distortions and costs.

Hedge funds are the world's biggest scam.

http://www.businessweek.com/printer/...re-for-suckers

Their fees are impossible to overcome long term, but they somehow find a steady stream of suckers. What is their pitch?

HFG - what is your and other people in the industry's opinion of academia?

I have tried to articulate a positive case for hedge funds throughout the thread.

The article linked to is interesting...the one actual objective study it mentions actually says hedge funds performed well!

For a while, the funds were expected to produce steady, modest returns, in contrast to the wider swings of the market. In a 2011 paper that he updated this year, Roger Ibbotson, a finance professor at the Yale School of Management who runs a hedge fund called Zebra Capital Management, analyzed the performance of 8,400 hedge funds from 1995 to 2012; he concluded that on average they generated 2.5 percent of precious alpha. “They have done a good job, historically,” Ibbotson says. “Now, I think it’s overcapacity. I doubt that the alphas are completely gone, but alphas are going to be harder to get in the future than they have been in the past.”

On the question of whether it has become harder to find alpha or not, more to come...

Of course one should try not to generalize...so insert statement here that not all academics are the same.

What does surprise me sometimes is the persistence of certain widely held academic views in the light of strong evidence to the contrary.

HFG,

In your observations and experience, which hedge fund strategy themes have worked the best for your fund and in general?

For example the popular strategies I see with most hedge funds are:
Long-Short
Market(Value) arbitrage
Event driven
Macro theme

Also, in your opinion what are the relative strengths and weaknesses of those strategies. Could you give (in general) perhaps an example when these did or didn't work for you? Also, thank you for the great thread.

Would be interested in hearing more on this.

Thx for a great thread

But you haven't really said anything except "hedge fund are great, trust me" and given a study or two (from people with vested interests in hedge funds).

To be fair, I have done a bit more than that (but not as much as I would like..day job...)

I did discuss the amazing track record of Millennium and their process for achieving it. It only takes one black swan to prove all swans are not white (and I think there are far more than one black swan).

If you look at the record of the 30 baseball GMs every year, despite the fact they are all paid millions of dollars, collectively they have a .500 record. Collectively they add no alpha! I have argued this is the tone and level of much of the anti-hedge fund debate.

Of course what matters is whether it is possible to be a better GM or not and if that person is identifiable. That such people exist (in baseball, poker and hedge funds) is the case I am trying to make.

not really, hes been pointing out some successful funds with long term track records and high information ratios. hes also highlighting that some academics and articles bashing hedge funds miss the important measuring tool and are simply comparing absolute returns vs the market.


Hedgefundguy, any chance you have time to answer my questions you said you'd get back to?

Will try to do so. If you don't mind, hit me with them again. I remember them being good questions so part of the delay is because I wanted to answer them well. There are also some questions that I might pass on for any number of reasons, but trying to answer as many as I can.

Apologies.

Sorry this is the last time I'll ask but I think my question was overlooked (just ignore if not).

I'm curious as to what the most difficult sort of ethical decisions you run into are in running your hedgefund. I'm not interested in one-off decisions, more of the ones you most commonly run into and how you deal with them.

I honestly think my utility function is well aligned with my investors and I therefore do not face too many ethical decisions.

hey hedgefundguy,

sorry about reposting this, but my questions were on the last post of the previous page so it might've been overlooked:

"-how much does financials factor into your ultimate decision?
-what are the top 3 factors you look at when deciding to invest?
-can you walk through your process when you receive an investment pitch?
-would you be so kind to take a look at some of our stock pitches here in BFI? we can send it to an anonymous email account you set up.

I've mostly followed value investors over the years so I don't really know much about multi-strategy, so I apologize for the newbie questions"

financials highly important

I try to value an investment before I know where it trades, then if it trades significantly above or below my initial valuation I challenge myself and my team to try and figure out everything we missed. Typically, we see "the wisdom of the crowd", but sometimes we conclude the market is "wrong"

Will always listen to a pitch But I hear many, so please don't assume I will have the fastest or most complete response. Will do my best. A concise pitch is appreciated

I think of myself as value investor, but not limited to stocks. "There no good or bad bonds (stocks, options...), only good or bad prices"