Good reads from around the Web.
Why don’t hedge funds just track the indices? I mean this as a (semi) serious – albeit rhetorical – question.
On a rolling basis the returns from their current methods look lousy, as we were reminded again this week by FT Alphaville:
…stock-trading hedge funds had produced returns of just 8.7 per cent total in the previous three years.
Though it’s a shame the S&P 500 is up two-thirds, with dividends, since the end of 2009.
On the face of it a hedge fund could just track a stock market index and cream off its 2/20% cut, and beat most of its rivals.
But in reality things aren’t so simple.
For starters it’s not really fair to compare a basket of hedge funds with a pure equity index. While I’m skeptical of the wider claims for the hedge fund industry, I concede some do hedge, some may achieve absolute returns year-on-year, and some do deliver uncorrelated returns.
True, even those that do will probably be beaten by a simple 60/40 equity/bond ETF combo, after fees, but the point is you can’t really compare an equity index in a bull run with a wider variety of trading strategies.
Oh yes, fees. That’s a bigger reason. Passive indexing works mainly because it’s cheap. If a hedge fund holding just index funds still syphoned off one-fifth of their investors’ returns, they’d by definition still do much worse than pure index investors.
But I think the biggest reason is probably marketing.
Total money invested with hedge funds continues to grow not because their returns are good, but because the story is:
Hedge funds can’t tell their investors they will simply hold mix of passive funds and rebalance, because nobody is going to pay up for that – even if the results are comparable.
No, people like to think they’re different, special, and deserving of special insightful managers. They will pay to be indulged in their fantasies.
For as long lives such delusions, so will hedge funds.
(So, forever then).
From the blogs
Making good use of the things that we find…
- Explaining the ‘it’s different for me’ mentality – Rick Ferri
- Indexing is a great financial innovation – Vanguard blog
- The awesome Stephen Bland is now HYP-ing again – Stockopedia
- Why the US market was right to rally – Investing Caffeine
- Imperial Tobacco shares: Buy, hold, or sell – UK Value Investor
- What to do in this market – The Brooklyn Investor
- Make the most of your mistakes – Clear Eyes Investing
- Why ASOS must grow – iii blog
- Stop shorting the market already – mcturra2000
- The trouble with retirement calculators – Mint
- People are seriously deluded about debt – Simple Living in Suffolk
- Case study: Should he claim his freedom? – Mr Money Mustache
- Why Twitter’s IPO is bad for start-ups – Jack Altman
Product of the week: Lenders are making it easier to get a Buy-To-Let loan, according to the FT [search result]. Natwest currently tops the tables with a 2.69% rate for deposits of 40% or more. There’s a £1,995 fee.
Mainstream media money
Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber of that site.1
- Ex-hedgie now on an indexing crusade… – Index Universe
- …and a podcast interview with the same chap – Motley Fool
- Why not just buy Buffett? – Swedroe/MoneyWatch
- Investors leave billions on the table – WSJ [via Mike]
- Five more big mistakes that investors make – Forbes
- Terry Smith’s ‘simple investing’ has delivered – Guardian
- Go active or passive in small caps? – Index Universe
- Bond funds are due a bad surprise – MorningStar
Other stuff worth reading
- Strange tales from London’s property market – Guardian
- Investing legend Peter Lynch now gives away his money – N.Y.T.
- Millionaire Martin Lewis shops in Poundland – Telegraph
Book of the week: A final plug for Investing Demystified seeing as its author, Lars Kroijer, is interviewed twice in the passive investing links above. It’s the best Tim Hale rival out there for UK passive investors.
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- Reader Ken notes that: “FT articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”.” [↩]