Not a hedge fan here, but the issue I see with these "global hedge funds" comparisons, is that nobody really wants THAT performance, just like nobody wants the aggregate performance of all active long-only managers. What you want is either a HF pod or that one hf you believe is a star (you may not get star performance, but you can try)
That's exactly the argument I make. Get a good single hedge fund and you can have real benefits. But especially inthe wealth management industry, people are being sold hedge fund portfolios which typically mimic the universe overall. The vast majority of private investors is in these prodducts.
I do not know what a HF pod is, but as for backing a star manager, that is gambling. Do you remember Woodford, Lindsell Train and Terry Smith ? They were star managers.
the averaged Hedge Funds provided a diversification benefit in a apparently rare event, i.e. when a tail risk materialized. Isn‘t that exactly what I am looking for as an investor?
I mean, diversification is of limited benefit during the normal course of stock market development, is it? In fact it appears to me that correlation goes to 1 across most asset classes in a real crisis situation.
I agree that diversification benefits in a rare event is desirable, but wait until next Wednesday when I will create a financial product (which ironically exists already in the USA but not in Europe, as far as I know), which does just that.
I avoid hedge funds on principle, but in this case I think that if you assess the graphs by incorporating the standard error of the estimate, you will find there is no difference. But the risk is hugely different, because 50% of hedge funds will underperform, and with fees of 2 and 20 % a really bad one will ruin you. So why take that risk? And then, why not test the hedge funds against the Buffett 90/10 favourite, which I think will win hands down?
I don't like 60/40 (2022 fixed that wagon for me) unless the "40" in the equation is BTAL. Sharpe from 2012 to end-March 2025: 1.14.
I do continue to like Harry Browne (despite 2022). One-fourth each of stocks, intermediate treasuries, gold and cash, since 1972 to end-March 2025: CAGR 8.31%, maximum drawdown -13.19%.
This is rebalanced annualy, so creates about 10 minutes of work per year. But what would a fund manager do with the rest of his time?
Today it is feasible for American investors to hold the 60/40 stock/bond portfolio that Joachim describes for a total of 3 (yes, three, not 30) basis points. Add perhaps another 5 basis points p.a. for trading costs on rebalancing (and that is probably an overestimate) for a total of less than 10 basis points. Additionally, the "live" index funds might lag their indexes by a bit, but typically by a few bps per annum, not 20 bps. So, no need for the conservative 30 bp assumption about expenses on the 60/40 account.
Curious how often do you rebalance your 60/40 portfolio in these charts to stay 60/40.
Monthly
Not a hedge fan here, but the issue I see with these "global hedge funds" comparisons, is that nobody really wants THAT performance, just like nobody wants the aggregate performance of all active long-only managers. What you want is either a HF pod or that one hf you believe is a star (you may not get star performance, but you can try)
That's exactly the argument I make. Get a good single hedge fund and you can have real benefits. But especially inthe wealth management industry, people are being sold hedge fund portfolios which typically mimic the universe overall. The vast majority of private investors is in these prodducts.
Got it. Wonderful products if they deliver 60/40 results with >1% mgt fees - you can tell the clients they have alt exposure without downside risk 💯😉
I do not know what a HF pod is, but as for backing a star manager, that is gambling. Do you remember Woodford, Lindsell Train and Terry Smith ? They were star managers.
A HF pod is a separated account in a hedge fund where a specific team or manager runs your money.
Absolutely, it's usually gambler's fallacy but it still makes more sense
Dear Joachim,
the averaged Hedge Funds provided a diversification benefit in a apparently rare event, i.e. when a tail risk materialized. Isn‘t that exactly what I am looking for as an investor?
I mean, diversification is of limited benefit during the normal course of stock market development, is it? In fact it appears to me that correlation goes to 1 across most asset classes in a real crisis situation.
Best regards
Christian
I agree that diversification benefits in a rare event is desirable, but wait until next Wednesday when I will create a financial product (which ironically exists already in the USA but not in Europe, as far as I know), which does just that.
I avoid hedge funds on principle, but in this case I think that if you assess the graphs by incorporating the standard error of the estimate, you will find there is no difference. But the risk is hugely different, because 50% of hedge funds will underperform, and with fees of 2 and 20 % a really bad one will ruin you. So why take that risk? And then, why not test the hedge funds against the Buffett 90/10 favourite, which I think will win hands down?
All true, except that he hedge fund performance shown is after the fees have been subtracted.
I don't like 60/40 (2022 fixed that wagon for me) unless the "40" in the equation is BTAL. Sharpe from 2012 to end-March 2025: 1.14.
I do continue to like Harry Browne (despite 2022). One-fourth each of stocks, intermediate treasuries, gold and cash, since 1972 to end-March 2025: CAGR 8.31%, maximum drawdown -13.19%.
This is rebalanced annualy, so creates about 10 minutes of work per year. But what would a fund manager do with the rest of his time?
Looks like hedge funds are still not living up to the hype. Curious to see where this goes in Part 2!
Today it is feasible for American investors to hold the 60/40 stock/bond portfolio that Joachim describes for a total of 3 (yes, three, not 30) basis points. Add perhaps another 5 basis points p.a. for trading costs on rebalancing (and that is probably an overestimate) for a total of less than 10 basis points. Additionally, the "live" index funds might lag their indexes by a bit, but typically by a few bps per annum, not 20 bps. So, no need for the conservative 30 bp assumption about expenses on the 60/40 account.