Key Posts from the first 1500, #5

This very, very interesting post was post #17 on the board,, and was dated Jan 3, 2014, it’s about Hedge Fund results. I’ve cut it down some and added some current explanatory remarks.

This is an excerpt from a Reuter’s article today

Activist investor and hedge fund manager Daniel Loeb beat most rivals hands down last year as his flagship fund kept pace with a rallying U.S. stock market and returned 25.2 percent in 2013. Loeb’s $14 billion firm, Third Point, has been one of the industry’s best performers for several years now…

The figures were above the 6.5 percent global average return of hedge funds in 2013 and were in line with the Standard & Poor’s 500 Index which climbed 29.6 percent, the index’s strongest annual return since 1997. Loeb, who most helped install Marissa Mayer as CEO at Yahoo and is currently trying to overhaul auction house Sotheby’s, did not specify the investments that powered his strong returns. While Loeb often employs a go-anywhere trading strategy, last year the bulk of his bets were on large U.S. stocks…

This is astounding. The average hedge fund gained 6.5% on the year, when the S&P 500 gained 29.6%, and Loeb is congratulated because he gained 25%. It shows how hard it is when you are investing billions of dollars, and how we can beat any Mutual or Hedge Fund on a consistent basis. He’s too big to invest in most MF RB type stocks.

May 28, 2014 – My Current Commentary: The above is what I thought was the explanation when I wrote it in January. I now realize that it’s only a small part of the explanation.

The real explanation for the low overall average of 6.5% by hedge funds, is that hedge funds, by definition, invest in a lot of things like stock market index futures, bond index futures, currency futures and commodity futures, in addition to investing in common stocks. Now what links all these investments together? Excluding the common stocks, they are all zero-sum games! One person buys a contract and one person sells the contract. One person ends up with a profit and the other person ends up with exactly the same loss.

Now, hedge fund managers are generally smart guys, but they have differing opinions. Assuming that there were hedge funds on both sides of most of these zero-sum trades, logically the worldwide sum of hedge fund results would balance out at zero! One loses what the other one gains. The reason that they ended up with positive 6.5% is that they also invested a part of their money in common stocks in a year when the S&P was up 29.6%.

Loeb did so much better than average last year because he didn’t invest like a hedge fund, but invested mostly in US common stocks, so his results were pulled along by the S&P and he almost equaled it. “While Loeb often employs a go-anywhere trading strategy, last year the bulk of his bets were on large U.S. stocks”