“The race is not always to the swift, nor the battle to the strong, but that is the way to bet.” (Misquoted quote)
Anyone who knows about the Pareto distribution, which I brought up a few posts back, knows that Buffett had the odds in his favor: three out of four investors underperform the market and hedge funds are no exception (specially not if they clip you for 2 plus 20).
The Hedge Fund Industry Just Got Decimated By The VIX
We’re potentially witnessing the end of an industry.
You may have heard about the bet Warren Buffett made. The winner of this bet wins $1 million. He essentially said an S&P 500 Index Fund will outperform 10 hand-picked hedge funds over 10 years.
I have a couple of points to make while sharing your general view:
Of the documented results (essential) after fees (essential) of professional investors over a realistic statistical investment timescale of 15-20 years (essential), there is no evidence that one in four investors outperforms the market. Indeed the evidence points to the interesting possibility that no more such accredited investors beat the market than random chance would predict and you can count them on one hand. Hence the popularity of ETFs.
In fairness to the hedge funds (for which I hold no brief whatever) they chose an extremely rash time to make their bet with Buffett although neither party could have predicted quite the extent to which the Fed. would become the staunch friend of the market. Nevertheless, they should definitely ask for a roll-over for another 10 years, when it seems to me likely they would win handsomely. Or darn well should. From now on will be when the shrewd investor leaves the S&P in the dust, possibly even showing a positive return.
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In fairness to the hedge funds (for which I hold no brief whatever) they chose an extremely rash time to make their bet with Buffett although neither party could have predicted quite the extent to which the Fed. would become the staunch friend of the market. Nevertheless, they should definitely ask for a roll-over for another 10 years, when it seems to me likely they would win handsomely.
In all fairness, neither party could have predicted the housing crash that allowed the hedge fund basket to beat Buffet…for one year. Could you not predict that 2&20 is a killer fee doomed to failure (on average) and that is why he insisted on 10 hedge funds, to take the luck out of it. He was willing to take this bet for a Ling time and no one would man up for it. Buffet would make this bet every year but good luck find someone to take the other side. Sure you could cherry pick a fund that beat the market over ten years but you could cherry pick a stock that beat every hedge fund over any ten year period.
In fairness to the hedge funds (for which I hold no brief whatever) they chose an extremely rash time to make their bet with Buffett although neither party could have predicted quite the extent to which the Fed. would become the staunch friend of the market
Ok, let me address this again. These hedge fund guys are the Masters of the Universe and The Smartest Guys in the Room and they get paid 2&20 precisely to see that coming. Are they incapable of adjusting to it in 10 years? Buffet was the only one that could NOT adjust. He couldn’t sell, couldn’t short, couldn’t go on margin, couldn’t swap to the QQQ and he proved they were not so smart after all. Oh, they are smart at taking clients money, that is for sure, but maybe not so much as making it for them.
My point is really that, while the index has served investors well over the last seven years resulting in investors pouring into ETFs, paradoxically it is likely that active management may, despite the ordure that has been heaped on it, now come into its own and index investors find themselves at a disadvantage.
You are of course right that investors who accept the old 2 and 20 scam - or for that matter performance fees - may do poorly. However, I sense these are on the way out. ETFs have made the customer king. The worm has turned. Virtue-signalling by managed funds is going to be in fashion while the law is going to demand they are honest to the investor about what he is paying.
They will of course try to continue the old ‘one, three and five years if we have to’ results routine but I think we all know the part played by chance in that chimera.