Was that a typo ? Did you mean before 00 ?
Interesting that your friend seems to have only performed well from 00-02. Perhaps his fund leans on the bearish side too much? Nevertheless, this is a pretty strange statement to come out with. The definition of an "underleveraged" fund is of course, very subjective, but surely any leverage whatsover increases your risk? Even a market neutral, low volatility seeking strategy does not imply the absence of risk.
Subprime CDOs and corporate junk bonds may have low volatility (many subprime CDOs are not even marked-to-market) but that does not imply they have less risk than the general market.
Key Characteristics of Hedge Funds
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- Many hedge funds have as an objective consistency of returns and capital preservation rather than magnitude of returns.
This is why they are low risk (volatility).
Having taken the risk of on average around 6% volatility vs like 17% for the S&P 500. From 95 to 02 their worst down month was like 2-3%. They were way underlevaged and probably didn't use enough capital, those results should be far higher.
Anyway I think it's funny that some people here have said that hedge funds underperform the market (which as far as I'm aware is true), have way more volatility than the market (not true) and according to river are only available to professional investors (don't think this is true but might depend on how he's defining professional).
So.....professional investors would choose an asset which underperforms the market with more volatility. Anybody else see the break in logic here?
No one likes the highwayman who robs the poor of their last pennies. But, who can fail to appreciate the polished society burglars, who pass among the rich only to relieve them of their diamonds and gold? What these super-rich hedge fund managers do is almost respectable: they separate the rich from their money! You can verify this for yourself. Just read from the Forbes list of rich people, where you will find hedge fund managers in droves, but we can guarantee you, not one hedge fund investor.
Didn't borrow enough capital you mean! I'm no expert but my understanding is that hedge funds in general tend towards low volatility, low risk trades but then try to beef the correspondingly poor returns with heavy gearing. I've heard tell of 50:1 in many cases - certainly the leverage on top of leverage LTCM applied could result in almost 1000:1 leverage in some trades.
As I said though, referring to a fund as "underleveraged" can only be a very subjective assessment. Any leverage would be too much for a fund I would invest in.
So if you like, you can view it that there is both risk and there is exposure to risk. Hedge funds might be low risk but the exposure they have to that risk generally greatly exceeds the capital of the fund. Look at the mess Bear Sterns is in - here for example.
I think this is where to confusion is arising regarding the risk involved in hedge fund investments.
I'm not sure if you see too many professional investors investing in hedge funds - as Bill Bonner puts it, there is something almost noble in their ability to relief the rich of vast sums of money in exchange for relatively poor returns.
I already showed that hedge funds create positive alpha.
You showed that a particular hedge fund created alpha at some point in the past, which is not the same thing.
There seems to be a heavy fear of leverage on this board for some reason. My point was if you leveraged his fund to the same risk as the S&P he would have vastly outperformed the market.
Many leveraged hedge funds are lower risk than the S&P. Would you invest in the S&P, a higher volatility investment?
Ok I think I see where you're coming from here. You're point is that hedge funds have a greater risk of ruin? I don't know the answer to that but a lot of mutual funds disappear as well. This line of reasoning might also explain why people keep referring to LTCM even though it's just 1 hedge fund out of approx 10,000 (I think).
I already showed that hedge funds create positive alpha. I also showed they are low volatility. Therefore they are creating relatively (compared to the market) good returns on a risk adjusted basis.
Your point about risk of ruin is worth considering but I don't have any data or statistics to argue it one way or the other.
There are simply too many hedge funds now for it to be argued that they all beat the market. Some have incredible returns spanning decades but these are the exception not to rule. Remember past volatility is no guarantee of future volatility and heavily leveraged hedge funds run a very real risk of significant loss of capital. The fact that they are leveraged means that one wrong bet often forces margin calls that must be met by liquidating profitable positions - this is what happened with Amaranth and more recently Bear Sterns. I'm pretty sure I've seen signs of similar things happening in certain markets as well.
No; if you recall I linked a study which showed that Hedge funds created an alpha of 3.04% and L/S Hedge funds created an alpha of 5.41%. Here it is again.
No; if you recall I linked a study which showed that Hedge funds created an alpha of 3.04% and L/S Hedge funds created an alpha of 5.41%. Here it is again.
Did this study use traditional or non-traditional betas?
You showed that a particular hedge fund created alpha at some point in the past, which is not the same thing.
From the abstract: 'We analyze the performance of a universe of about 3,500 hedge funds from the TASS database from January 1995 through April 2006'. Particular hedge funds, over a particular period in the past.
I'd go along with CapitalCCC's suggestion that hedge funds could form part of an investment strategy but not all. Depends on the fund though obviously.
Hedge Funds are like any asset. They have their advantages and disadvantages and it comes down to individual investment decisions.
Traditional.
Redjoker that survey you mention (of hedge fund performance) has a major flaw - it excludes the hedge funds...and God there are many...that went belly up during the reporting period and so were not included by the end of the survey, this survivorship bias means that hedge fund surveys always overstate the performance of hedge funds and understate their volatility.
Do you know of any studies that use multi-factor betas? Any hedge fund that simply used a momentum factor for example in the past could expect to show positive alpha using traditional beta, but I'd hardly use that as evidence of manager skill.
From the second sentence of the abstract:
"First, we analyze the potential biases in reported hedge fund returns, in particular survivorship bias and backfill bias, and attempt to create an unbiased return sample." etc, etc, etc