The Golden Era of Hedge Funds Draws to a Close with Clients in Revolt(bloomberg.com)
bloomberg.com
The Golden Era of Hedge Funds Draws to a Close with Clients in Revolt
https://www.bloomberg.com/news/articles/2016-12-29/hedge-fund-agonistes-not-even-donald-trump-can-ease-the-pain
88 comments
I think what we're seeing is a significant shift away from actively managed funds to passively managed funds, like index funds. People are becoming more educated about personal finance and are recognizing how much active management fees eat into their returns. There are also much more options than there used to be (e.g. ETFs).
The people that invest in hedge funds are, by definition, sophisticated investors. I don't buy the idea that they didn't understand the implications of a "two and twenty" fee structure until recently.
What you have said is certainly true for the average retail investor that simply isn't legally allowed to invest in a hedge fund, of course.
What you have said is certainly true for the average retail investor that simply isn't legally allowed to invest in a hedge fund, of course.
hedge funds investors on average are large, "qualified", and sophisticated. the money's leaving because they've underperformed (they always do in big bull runs), not because endowments etc have gotten "more educated about personal finance".
Some of the underperformance has been attributed to the crackdown in insider trading
unlikely. i think it has more to do with competitive pressures in markets and the elimination of a lot of the less sophisticated participants (partly due to higher frequency trading).
Why would you say it is unlikely?
I think the commenter who stated that it is likely should cite their source. If you make an assertion like that, you should back it up.
While that is true, the guy who said it was unlikely was guilty of the same crime. They both need a "citation needed" response.
I personally remember enough cases like Steven A Cohen and Galleon and the Gerson-Lehrman group[0], that I assign the probability "likely" to that claim, so if someone says "unlikely" I ask him for his reasoning because I might need to update my estimates. I was not trying to say it is wrong, just understand his reasoning.
[0] https://en.wikipedia.org/wiki/Gerson_Lehrman_Group#Controver...
I personally remember enough cases like Steven A Cohen and Galleon and the Gerson-Lehrman group[0], that I assign the probability "likely" to that claim, so if someone says "unlikely" I ask him for his reasoning because I might need to update my estimates. I was not trying to say it is wrong, just understand his reasoning.
[0] https://en.wikipedia.org/wiki/Gerson_Lehrman_Group#Controver...
> the crackdown in insider trading
Which, in reality, was the SEC and Preet Bharara trying to say that large investors aren't allowed to have meetings with the execs and investor relations people at the companies that they were large investors in, which doesn't make much sense and was knocked down by the courts.
Which, in reality, was the SEC and Preet Bharara trying to say that large investors aren't allowed to have meetings with the execs and investor relations people at the companies that they were large investors in, which doesn't make much sense and was knocked down by the courts.
in reality
There was a lot more to "reality" than you make it out to be. E.g. there's this clown https://en.wikipedia.org/wiki/Raj_Rajaratnam#Conviction_and_... and 13 of his buddies who were all convicted and who are doing time.
And don't forget about Stevie Cohen https://en.wikipedia.org/wiki/Steven_A._Cohen#Controversy who managed to skate personally but whose hedge fund pleaded guilty to criminal charges and agreed to a $1.8 billion settlement.
There was a lot more to "reality" than you make it out to be. E.g. there's this clown https://en.wikipedia.org/wiki/Raj_Rajaratnam#Conviction_and_... and 13 of his buddies who were all convicted and who are doing time.
And don't forget about Stevie Cohen https://en.wikipedia.org/wiki/Steven_A._Cohen#Controversy who managed to skate personally but whose hedge fund pleaded guilty to criminal charges and agreed to a $1.8 billion settlement.
It's possible that their views on the EMH have changed, too, no?
You're right, I was thinking actively managed funds in general, not specifically hedge funds.
> People are becoming more educated about personal finance and are recognizing how much active management fees eat into their returns.
Do you have a source that supports what this implies?
Do you have a source that supports what this implies?
Everything I've run across for years now indicates it's a combination of Dunn's law and annoyance with fees driving the shift.
---
"Fees matter. That is the overarching sentiment that emerged from an online Wall Street Journal survey asking readers about their investment style and satisfaction as part of the Journal’s series looking at the rise of passive, or index-based, investing."
http://www.wsj.com/articles/readers-react-low-fees-are-drivi...
---
"Lower fees, as opposed to better performance, may be the big reason more investors are switching from active to passive. Morningstar found the investors in active funds improved their odds of beating passive funds by favoring funds with lower-than-average expense ratios."
"It's not so much about active versus passive as it is about fees," Morningstar's Johnson said.
http://www.cnbc.com/2016/08/29/investors-say-forget-it-to-ac...
---
And this has been going on for ten years, which implies a sustained shift of understanding rather than a blip:
http://www.wsj.com/graphics/passive-investing-five-charts/
---
"Fees matter. That is the overarching sentiment that emerged from an online Wall Street Journal survey asking readers about their investment style and satisfaction as part of the Journal’s series looking at the rise of passive, or index-based, investing."
http://www.wsj.com/articles/readers-react-low-fees-are-drivi...
---
"Lower fees, as opposed to better performance, may be the big reason more investors are switching from active to passive. Morningstar found the investors in active funds improved their odds of beating passive funds by favoring funds with lower-than-average expense ratios."
"It's not so much about active versus passive as it is about fees," Morningstar's Johnson said.
http://www.cnbc.com/2016/08/29/investors-say-forget-it-to-ac...
---
And this has been going on for ten years, which implies a sustained shift of understanding rather than a blip:
http://www.wsj.com/graphics/passive-investing-five-charts/
I'll make a prediction.
What's going away is the middle. The Billion dollar fund for equities, I'm not sure what the equivalent size would be for a bond fund or Credit fund.
At the high end you'll always have your Genious stock piker funds, like Buffet and Ackerman, etc. and your best in breed technology funds like Two Sigma.
At the low end you'll still have a bunch of 50-500 million dollar funds that will always spring up and do well enough on the current market trend they predict or leverage.
Unfortunately for the middle managing money gets tough. You can't compete with the really large funds for people or tech due to the amount of money and interesting problems they can throw at the hiring problem.
It also gets harder to manage money when you get that big, old strategies might not be able to carry the new money you bring in from trading gains.
What's going away is the middle. The Billion dollar fund for equities, I'm not sure what the equivalent size would be for a bond fund or Credit fund.
At the high end you'll always have your Genious stock piker funds, like Buffet and Ackerman, etc. and your best in breed technology funds like Two Sigma.
At the low end you'll still have a bunch of 50-500 million dollar funds that will always spring up and do well enough on the current market trend they predict or leverage.
Unfortunately for the middle managing money gets tough. You can't compete with the really large funds for people or tech due to the amount of money and interesting problems they can throw at the hiring problem.
It also gets harder to manage money when you get that big, old strategies might not be able to carry the new money you bring in from trading gains.
If anything, we'll see a skew towards smaller funds. Fact is, it's mindbogglingly difficult to achieve stellar returns with a lot (>= 500MM) of money. At those to sizes, a lot of great strategies fail to scale effectively.
250-500MM is a nice amount of money to manage. It lets the fund pay its small employees nicely and it doesn't have to deal with the logistical nightmares of needing to move massive amounts of capital around.
The startup <50MM and small <250MM funds will continue to be of interest to investors since they often can employ profitable strategies at that scale.
250-500MM is a nice amount of money to manage. It lets the fund pay its small employees nicely and it doesn't have to deal with the logistical nightmares of needing to move massive amounts of capital around.
The startup <50MM and small <250MM funds will continue to be of interest to investors since they often can employ profitable strategies at that scale.
It's the winner-take-all phenomenon, it crops up everywhere
Not exactly. It's more likely a log-normal distribution. Winner-take-all means there's only 1 left at the end. I doubt that.
So income inequality comes to hedge funds?
In tech there is an interesting phenomena I've watched emerge several times; A new technology or process gets going, it has lots of players, the market grows until the technology matures and then it splits where the high end gets more high and the middle dies. New players keep appearing but they can't jump the void between new player and high end player.
So for semiconductors there were dozens of chip companies and they all had various things they made. Then the market matured and only the people who could reliably fab chips remained at the top. The good middle companies were absorbed into the top, the not great ones died, and now you've got some boutique small ones (fabless) and the big guns.
For "personal computers" or the PC space same thing, lots of companies, then fewer and fewer, and then just a handful.
For Web companies same thing, lots of companies, then fewer and fewer, and then just a handful.
(and interesting to see technology that sort of fizzled like personal robotics and 3D printing)
Given that the incoming administration is pretty friendly to wall street I would expect at least some boost for the industry.
In tech there is an interesting phenomena I've watched emerge several times; A new technology or process gets going, it has lots of players, the market grows until the technology matures and then it splits where the high end gets more high and the middle dies. New players keep appearing but they can't jump the void between new player and high end player.
So for semiconductors there were dozens of chip companies and they all had various things they made. Then the market matured and only the people who could reliably fab chips remained at the top. The good middle companies were absorbed into the top, the not great ones died, and now you've got some boutique small ones (fabless) and the big guns.
For "personal computers" or the PC space same thing, lots of companies, then fewer and fewer, and then just a handful.
For Web companies same thing, lots of companies, then fewer and fewer, and then just a handful.
(and interesting to see technology that sort of fizzled like personal robotics and 3D printing)
Given that the incoming administration is pretty friendly to wall street I would expect at least some boost for the industry.
That's the normal life-cycle of a maturing industry, or more generally, new species flooding into a ecological niche (you can see this a recently burned forest, as waves of different species recolonize it) [1].
At the beginning, the niche is empty and new entrants flood in. The key quality for the first colonizers is to be aggressive, reproduce quickly, and be 'good enough' generalists. However, as the niche fills up, increasingly specialized species slowly push out the generalists. Note that the specialists generally don't try to compete with one another very much (competition is expensive), but create their own niche-within-a-niche.
There are always new species trying to muscle in, but the specialists are able to keep out competitors by being the best-adapted for that particular role.
[1] https://en.wikipedia.org/wiki/Ecological_succession
At the beginning, the niche is empty and new entrants flood in. The key quality for the first colonizers is to be aggressive, reproduce quickly, and be 'good enough' generalists. However, as the niche fills up, increasingly specialized species slowly push out the generalists. Note that the specialists generally don't try to compete with one another very much (competition is expensive), but create their own niche-within-a-niche.
There are always new species trying to muscle in, but the specialists are able to keep out competitors by being the best-adapted for that particular role.
[1] https://en.wikipedia.org/wiki/Ecological_succession
Because it was a golden age for hedge fund managers, not their clients!
It's been that way for quite a while. E.g. there was a book written (perhaps in 1955) titled
[1] http://www.wiley.com/WileyCDA/WileyTitle/productCd-047177089...
[2] http://www.fool.com/investing/general/2014/02/21/where-are-t...
Where Are the Customers' Yachts?[1]
or A Good Hard Look at Wall Street
[1] http://www.wiley.com/WileyCDA/WileyTitle/productCd-047177089...
[2] http://www.fool.com/investing/general/2014/02/21/where-are-t...
If I have $100k, where should I put it in ?
Betterment, Wealthfront, or Vanguards robo-advisor.
I do not receive a direct benefit from making this recommendation. (Not counting the feeling of doing good, or engaging in debate here or whatever).
I do not receive a direct benefit from making this recommendation. (Not counting the feeling of doing good, or engaging in debate here or whatever).
Vanguard target date funds (moving into Admiral funds when your net worth permits). I had tens of thousands of dollars at Betterment and felt their fees were not worth it. All at Vanguard now.
EDIT: @ Silasx I don't disagree! Although, its cheaper for me to use Vanguard than to start my own index fund company. Not the hill I want to die on.
EDIT: @ Silasx I don't disagree! Although, its cheaper for me to use Vanguard than to start my own index fund company. Not the hill I want to die on.
Sorry for the rant, but it really irks me how Vanguard charges a fee for the target date funds, when all they do is buy shares of other Vanguard mutual funds, which themselves pay fees to Vanguard (and rebalance).
Does Vanguard offer Admiral target date funds? Something like an Admiral version of VFIFX would be nice. I don't see anything on the web about it.
They do not unfortunately. You'll spend 15 minutes rebalancing your portfolio every quarter if you're i admiral funds instead of target date; annoying, but not a deal breaker.
Quick answer:
35% in VOO, 35% in VWO, 30% in BND.
Depending on your risk tolerance you can lower/raise the proportion of BND.
35% in VOO, 35% in VWO, 30% in BND.
Depending on your risk tolerance you can lower/raise the proportion of BND.
As always, the quick answer is (almost) always wrong if for no other reason than you don't know anything about the person's situation.
"I have $100k what do I do with it?" is like asking "I have a car what do I do with it?"
If you live in Birmingham, AL and the car is a Tesla and your only method of transportation, the answer will be very different than if you live in San Diego and the car is one of five and it's a half million dollar supercar.
How old are you? How much do you have saved for retirement? How much do you want to earn during retirement? How much do you have in reserve in case you lose your job? In case you have major unexpected medical expenses? Has the money been taxed already or is it in a tax-advantaged account? Do you want it in a tax-advantaged account? What happens to you financially if you lose 10/20/50/100% of it? What happens to you mentally if you lose that percentage?
"Put it in these three funds" is the nest egg equivalent of saying "You drive it, duh" when someone asks what to do with their car.
"I have $100k what do I do with it?" is like asking "I have a car what do I do with it?"
If you live in Birmingham, AL and the car is a Tesla and your only method of transportation, the answer will be very different than if you live in San Diego and the car is one of five and it's a half million dollar supercar.
How old are you? How much do you have saved for retirement? How much do you want to earn during retirement? How much do you have in reserve in case you lose your job? In case you have major unexpected medical expenses? Has the money been taxed already or is it in a tax-advantaged account? Do you want it in a tax-advantaged account? What happens to you financially if you lose 10/20/50/100% of it? What happens to you mentally if you lose that percentage?
"Put it in these three funds" is the nest egg equivalent of saying "You drive it, duh" when someone asks what to do with their car.
Sure... I think the portfolio is a reasonable choice for the typical HN user. By that I mean someone around 25-35 working in the technology sector with a high but not extraordinarily high income.
If you are assuming a 25 - 35 year old, you must be very risk averse as 30% is pretty high for such a young person to have in bonds.
It's interesting how that has changed over the years. For a long time, the standard advice was for investors of any age to have 50% stock and 50% bonds. Then "age in bonds" came around, and now many people recommend even less than that.
Of course, 50% bonds was easy to recommend 40 years ago when US savings bonds paid 5-7% annual interest, guaranteed for 30 years.
Of course, 50% bonds was easy to recommend 40 years ago when US savings bonds paid 5-7% annual interest, guaranteed for 30 years.
Stocks have outperformed bonds over long periods of time but are riskier, so if you need cash soonish (close to retirement), you should be in bonds, but if you're not going to touch that 401(k) for 35 years, then you should be in stocks.
> Of course, 50% bonds was easy to recommend 40 years ago when US savings bonds paid 5-7% annual interest, guaranteed for 30 years.
Inflation in 1980 was over 13%. 2015 was less than four fifths of one percent. Bonds today pay out much better than they did 40 years ago.
Inflation in 1980 was over 13%. 2015 was less than four fifths of one percent. Bonds today pay out much better than they did 40 years ago.
[deleted]
Isn't that a little too much weight to Emerging Markets(VWO)?
How about simply 70% VT (Total World), and 30% BND
How about simply 70% VT (Total World), and 30% BND
You would have a higher effective fee, 0.14% vs 0.10% if you had an equal split between VOO and VWO.
That said, I think there is healthy skepticism with the world funds in terms of their ability to reduce risk considering so much correlation to us stock and dollar value, relatively high fees, and relatively weak long term performance relative to US markets.
Some of this is due to China not making available some of their investment opportunities to foreigners. I'd love to get an index fund that has exposure to growing companies like DJI or Didi.
That said, I think there is healthy skepticism with the world funds in terms of their ability to reduce risk considering so much correlation to us stock and dollar value, relatively high fees, and relatively weak long term performance relative to US markets.
Some of this is due to China not making available some of their investment opportunities to foreigners. I'd love to get an index fund that has exposure to growing companies like DJI or Didi.
If you want to invest in Didi, which hasn't had an IPO yet, you can invest in Apple and Alibaba, which have invested a lot of money in Didi.
Given that Apple is the largest holding in most S&P 500 and total stock market index funds, anyone who has invested in those funds will benefit somewhat from the success of Didi.
Jack Bogle, the founder of Vanguard, goes so far as to argue that a broad US-market index fund is all you need for international exposure, because many US companies will benefit from the success of the international companies they have invested in and do business with.
I don't quite buy that argument, but it's something to keep in mind when you construct a portfolio: index funds that appear to be distinct often overlap.
Given that Apple is the largest holding in most S&P 500 and total stock market index funds, anyone who has invested in those funds will benefit somewhat from the success of Didi.
Jack Bogle, the founder of Vanguard, goes so far as to argue that a broad US-market index fund is all you need for international exposure, because many US companies will benefit from the success of the international companies they have invested in and do business with.
I don't quite buy that argument, but it's something to keep in mind when you construct a portfolio: index funds that appear to be distinct often overlap.
You would be much more diversified, at lower cost, if you invested 50% in VSS (Small Cap International) and 50% in VOO. VSS has a negative fee due to its securities lending practices. And VSS has lower correlations with US stocks, while also possibly exposing you to small outperformance (in the 3-factor sense)
It's a fair point. I included it because it has a high exposure to Chinese equities.
[deleted]
Could you elaborate on that answer a bit (and maybe explain the symbols)?
This is a a pretty simple diversified, passive portfolio.
- VOO: tracks the S&P500 index (US large companies)
- VWO: emerging markets equities
- BND: US bonds
I picked these index funds because Vanguard ETFs are well-regarded for their quality and extraordinarily low expense ratios. For example, the much more well-known SPY ETF, which also tracks the S&P500, has an expense ratio of 0.10%. VOO has an expense ratio of 0.05%.
- VOO: tracks the S&P500 index (US large companies)
- VWO: emerging markets equities
- BND: US bonds
I picked these index funds because Vanguard ETFs are well-regarded for their quality and extraordinarily low expense ratios. For example, the much more well-known SPY ETF, which also tracks the S&P500, has an expense ratio of 0.10%. VOO has an expense ratio of 0.05%.
Or the fidelity clones like FUSEX. If it's taxable can use a service with index loss harvesting to get a little more boost...
Why those instead of VTI and VXUS? Broader exposure (more diversification) in those funds
I'd diversify further across fund managers, asset classes and geography.
> 35% in VOO, 35% in VWO, 30% in BND.
Is this just for now or in general?
Is this just for now or in general?
In general. This is a passive portfolio. It's designed for a style of investing where you automatically put a % of your income in to the portfolio every month or every quarter, with the occasional rebalance if needed.
What would your answer be for a person with a 20-25+ year horizon, looking for a sector with alpha on that time scale. Like say, an Intel or GE circa 1982 and not needing to touch it until 2007?
You are just as likely to pick a loser as a winner over that duration unless you have insider information. Just own the whole market and settle for average returns, which are a lot better than what you would get if you bet on the wrong sector or companies.
You don't think that there is alpha in say the Russell 2000 mid-cap over the DJIA in the long term? More room in small and mid caps to grow.
There is also more room in the small- and mid-cap companies for failure. If they had the kind of massive revenue, cash reserves, or really strong product lines that are needed to make it through hard times, they would be large-cap companies.
What are VOO, VWO and BND?
They're index funds, I believe all of these are offered by Vanguard.
What is your risk tolerance? What is your time horizon? Do you have any debt? At what rate? Is the interest on that debt tax-deductible?
Here are the portfolios of some popular robo-advisors https://senzu.io/investing/robo-advisors. You can buy the same funds using your own broker (Vanguard, Merrill Edge, Robinhood etc.)
AMD+Nvidia, not even kidding, i've made a ridiculous amount of money off them.
Err, AMD is down 55% over the last ten years. The total market up 65% over the same time period.
Those are ok as a small part of your portfolio but it shouldn't be everything
I have been always curious why hedge funds required a Phd in maths or comp sci. I would love to learn what algos and patterns in quantitative finance need a phd level of research ?
I would guess because its a cheap (in terms of time) way to search for really bright people. Obviously not the only way, and not fool-proof, but if you find someone who loves math and science enough to devote ~10 years of their life to it, chances are they're pretty sharp - at least in certain ways.
I wouldn't say their patterns and algos "need" that level of research. But what a hedge fund doesn't have is a lot of time to waste interviewing junior programmers/undergrads hoping to find nuggets of wheat in the chaff.
I wouldn't say their patterns and algos "need" that level of research. But what a hedge fund doesn't have is a lot of time to waste interviewing junior programmers/undergrads hoping to find nuggets of wheat in the chaff.
Reputation and credibility is important in attracting fund flows. Wouldn't you rather put your money with the guy with a team of PhDs?
it's insanely competitive due to low barriers of entry and availability of leverage / capital. the phd part is incidental in the same way an mba is to a lot of the banking world: it's a hoop that demonstrates rational competence (they were accepted to such and such great program), and it's a base to begin selecting for personnel.
Try your hand at stochastic partial differential equations
I've heard from a some friends on that career track that Wall Street hires physics PhDs not because the background is relevant (what they're doing isn't published in any curriculum - that's the point), but because it exercises the right set of cognitive skills, and they need the kind of people who graduate from top-tier physics PhD programs, even if they don't care about the physics.
From my experience (for a sub 100mil aum firm, 1 day or grater in a any given position), the stuff people use is mathematically simple: moving average crossovers and correlations between assets. All it requires is usually enough init funds to for it to be worth your time vs crud apping it up an taking it easy.
I have no degree nor any desire to seek one out.
I have no degree nor any desire to seek one out.
> what algos and patterns in quantitative finance need a phd level of research ?
Require a PhD? I'd say about none of them.
If we turn around the question to: "What algos and patterns in quantitative finance can be done by a 18 yo out of high school?" I'd say about none of them too.
The average to-be-programmer can't fizzbuzz. The average to-be-quant can't do basic statistics.
I don't know about the US but the universities I've attended in EU are extremely selective with Maths. Requesting a master or PhD is a good filter for anything math related.
Require a PhD? I'd say about none of them.
If we turn around the question to: "What algos and patterns in quantitative finance can be done by a 18 yo out of high school?" I'd say about none of them too.
The average to-be-programmer can't fizzbuzz. The average to-be-quant can't do basic statistics.
I don't know about the US but the universities I've attended in EU are extremely selective with Maths. Requesting a master or PhD is a good filter for anything math related.
Hedge funds often run at less than 100% net long, so it's not surprising to me that they "underperform" in booming bull markets. Shifting to the passive management exposes investors to huge losses that are often correlated to other economic issues. Chasing returns through "passive" vehicles now feels like herd behavior that will end poorly.
One thing no one has seemingly mentioned yet is the era of robo-investing ala betterment or wealthfront:
https://investorjunkie.com/35919/robo-advisors/
https://investorjunkie.com/35919/robo-advisors/
Now that hedge funds ran out of things to manipulate, the swamp drained itself.
In the end what matters in any investment is total return which has to include any fees. Many of these funds take a % of the profits, plus a guaranteed fee, but not any % of the losses. If you advertise only the trader's return, it sure looks much better than the total.
Lot's bitching and moaning in this article about 2/20, but no mention of PE and VC who also take 2/20. PE returns lately have been good, but VC returns on average over the long term have been underwhelming.
> VC returns on average over the long term have been underwhelming.
Genuine question: why do VC's continue to exist?
Genuine question: why do VC's continue to exist?
I think the best VCs have done amazingly
The best asset manager in any sector has done amazingly. That being said, it may be just as hard or harder to select an above average investor as it to select an above average investment.
you should see what small time real estate promoters out west charge for fees.
Recently (last year or so), I've noticed Morgan Stanley posting a continuous stream of programming jobs (C++, Python, Java...). I wonder : if this is related to the story?
I live in Canada and they might be looking into lower the cost of development and IT by hiring 'cheaper' labor?
Has anyone else noticed this big drive in recruitment from Financial sector (elsewhere than in Canada)?
I live in Canada and they might be looking into lower the cost of development and IT by hiring 'cheaper' labor?
Has anyone else noticed this big drive in recruitment from Financial sector (elsewhere than in Canada)?
If you look at the Dow (I know I know, small sample) over the last 10 years[0], it doesn't take a genius to see the emotions of the market over that time have been unease (year 1), panic (year 2), reluctance (year 3-6), and opportunistic (years 8-10).
After the next major correction, I wouldn't be surprised to see investors move back to hedge funds.
[0]https://www.google.com/finance?q=INDEXDJX:.DJI