Gyroscopic Investing

...In a new book entitled "The Hedge Fund Mirage," author Simon
Lack said real investor profits were a negative $308 billion
from 1998 to 2010. In 2008, when hedge funds should have  been
protecting investors' funds, they consumed nearly all of the
profits earned in previous years.

    Ronnie Shah, a research associate with Dimensional Fund
Advisors (DFA), a low-cost money manager (),
found that fees usually get in the way of producing superior
returns once you subtract all fund expenses -- which is
essential math for every investor.

    "The arithmetic of active management predicts that, in
aggregate, active managers will underperform the market by the
fees they charge," Shah wrote in an unpublished DFA paper
available to clients. The paper studied portfolio returns from
1927 through 2010.

    Of course, this is nothing new to index-fund investors, who
have been heeding the mantra of Vanguard Group founder Jack
Bogle for decades.

    Bogle keeps it simple for every investor. "Costs matter," is
his cri de coeur. The man should win a Nobel Prize in economics
not only for his good sense and durable mathematical truths, but
for inventing the index fund, which has saved and made investors
billions over the decades .

Read the rest here.

An excellent article that once again sticks pins in the hot air balloon that is actively managed portfolios.

Q: "How do you make a small fortune?"

A: "You start with a large fortune and invest it with a hedge fund."

Great article, thanks!

Does anyone have additional insight into why hedge funds are so popular?  Is it simply down to the cachet of the whole thing?  I've talked to a great many people that view this as simply being "what rich people do with their money".  I can't tell you how many people I've talked to who offhandedly remark that this would be the default destination for their money if they won the lottery.

Lone Wolf wrote:   I've talked to a great many people that view this as simply being "what rich people do with their money".  I can't tell you how many people I've talked to who offhandedly remark that this would be the default destination for their money if they won the lottery.

That's why they are popular, it's bragging rights and ignorance.

I have found repeatedly that the worst investments on the planet are sold to high net worth individuals. Because, as bank robber Willie Sutton would say, "That's where the money is."

I wondered whether it amounted to a sort of de-facto wealth tax. So long as wealthy people engaged in bonkers, leveraged, "30% gain for five years then 100% loss" shenanigans,  then everything would get redistributed as surely as if it was taxed away. It doesn't seem to quite work like that though. Pension schemes and endowment funds seem to have major holdings in hedgefunds. The hedgefund managers themselves are now the wealthy people. I saw something saying that the most popular investment (whatever that means) for hedgefund managers' own money was physical gold.

stone,

If it gets redistributed from people who have wealth but are stupid about how they save it, to shysters who know how to manipulate people, then I don't think you're achieving much of the "wealth tax" you had hoped for.

Many that made lots of money usually did it by taking concentrated risks in running their own business, concentrated stock positions, etc.

The problem is that they translate their acumen in running their business as meaning they are smarter than average investors. A lot of the investments offered to those with high net worth are sold with this spin. Terms like "exclusive" and "sophisticated investors only" make it seem more elite.

But again, these folks get the worst investments because you make more money fleecing 100 millionaires out of their money than 100 normal people. I have seen this repeatedly happen in the start-up world when company goes IPO or is acquired. The newly minted wealthy are preyed upon by the financial industry very aggressively.

Let's just say that many of the new Facebook IPO employee millionaires are not going to remain that way within five years.

moda0306 wrote: stone,

If it gets redistributed from people who have wealth but are stupid about how they save it, to shysters who know how to manipulate people, then I don't think you're achieving much of the "wealth tax" you had hoped for.

Totally totally true, I was trying to say just that.

stone wrote:

moda0306 wrote: stone,

If it gets redistributed from people who have wealth but are stupid about how they save it, to shysters who know how to manipulate people, then I don't think you're achieving much of the "wealth tax" you had hoped for.

Totally totally true, I was trying to say just that.

All money that goes from one person's hand to another is a wealth tax of sorts. Because that money is going to be spent and when it it spent it is taxed the entire time.

So if a hedge fund manager takes money from some wealthy investor and spends it on champagne, caviar and a private jet that money is still useful. The guy making and selling the champagne and caviar benefits. As does the factory making the jet, the airport that charges for its use, the mechanics that keep it going and the people flying it. And of course the government taxes at the consumption and income level the entire time.

In the end, that money is probably more useful to an economy than being sucked away in a wealth tax. It's more useful because individuals can allocate capital more efficiently than the government.

Craigr, isn't  it a real tragedy that those people don't end up as angel investors putting their personal experience behind how they invest in new start ups whilst keeping a low risk reserve to cover their backs so that they can continue doing that?  I guess such people are probably working so hard at getting their own businesses up and running that they don't have a chance to step back and smell the coffee before the financial predators swoop straight after an IPO.

craigr wrote: Many that made lots of money usually did it by taking concentrated risks in running their own business, concentrated stock positions, etc.

The problem is that they translate their acumen in running their business as meaning they are smarter than average investors. A lot of the investments offered to those with high net worth are sold with this spin. Terms like "exclusive" and "sophisticated investors only" make it seem more elite.

But again, these folks get the worst investments because you make more money fleecing 100 millionaires out of their money than 100 normal people. I have seen this repeatedly happen in the start-up world when company goes IPO or is acquired. The newly minted wealthy are preyed upon by the financial industry very aggressively.

Let's just say that many of the new Facebook IPO employee millionaires are not going to remain that way within five years.

Craigr, I do agree that a lot of government spending is on counterproductive stuff (such as red tape etc). I'm not sure that feeding money through the hedge fund conduit isn't also very very wasteful. For a start a lot of very highly educated creme de la creme people are busy doing wealth management rather than providing something useful. Also private jets etc are a real cost. Those could be sewers or innoculations or developing energy systems for when oil runs out. Also hedgefund managers don't spend all of their money. They use a lot of it to bid up asset prices. That then needs to be compensated for by deficit spending so as to avoid a demand shortfall deflationary spiral and we get the merry go round we are now on.

craigr wrote:

stone wrote:

moda0306 wrote: stone,

If it gets redistributed from people who have wealth but are stupid about how they save it, to shysters who know how to manipulate people, then I don't think you're achieving much of the "wealth tax" you had hoped for.

Totally totally true, I was trying to say just that.

All money that goes from one person's hand to another is a wealth tax of sorts. Because that money is going to be spent and when it it spent it is taxed the entire time.

So if a hedge fund manager takes money from some wealthy investor and spends it on champagne, caviar and a private jet that money is still useful. The guy making and selling the champagne and caviar benefits. As does the factory making the jet, the airport that charges for its use, the mechanics that keep it going and the people flying it. And of course the government taxes at the consumption and income level the entire time.

In the end, that money is probably more useful to an economy than being sucked away in a wealth tax. It's more useful because individuals can allocate capital more efficiently than the government.

stone wrote: Craigr, I do agree that a lot of government spending is on counterproductive stuff (such as red tape etc). I'm not sure that feeding money through the hedge fund conduit isn't also very very wasteful. For a start a lot of very highly educated creme de la creme people are busy doing wealth management rather than providing something useful.

They are providing something useful in someone's eyes.

I could just as easily dismiss the majority of government employees as not doing anything useful. But they'd disagree.

Also private jets etc are a real cost. Those could be sewers or innoculations or developing energy systems for when oil runs out.

That was an extreme example to make a point. Some guy tooling around in a private jet or yacht doesn't bother me. Someone in the economy had to make those things and keep them running. That is useful to the boat builder, airplane machinist, mechanic and crews of these vessels to have that work. Who are we to tell an private jet pilot and air traffic controller that their jobs are not useful because we're jealous of what some rich guy does with his own money?

As for the other things (sewers, inoculations, etc.). That's all fine and good. But cities tax for sewers and do OK. As for alternative energy investing. Honestly I wish the govt. would get out of the business entirely. They invest in the wrong things (Solyndra, Chevy Volt) and divert useful research away from other areas. Instead we end up with corn ethanol and other wasted efforts.

Also hedgefund managers don't spend all of their money. They use a lot of it to bid up asset prices. That then needs to be compensated for by deficit spending so as to avoid a demand shortfall deflationary spiral and we get the merry go round we are now on.

We don't know what they are spending their money on. All I do know is that because it is their money they will be more careful with it than govt. spending. Politicians don't care if they waste money because it doesn't affect them directly. They use it to get re-elected and then move on.

re: Angels.

A lot of people that are high net worth do angel investing. Angel investing is extremely risky. Probably riskier than penny stocks. Angel investing might not mean starting a new tech start-up. It could be as simple as giving a brother a loan to start a local convenience store or bakery. The point really is that they will invest the money more carefully than govt. because if they make a bad choice they go broke. The government on the other hand doesn't care about losses. That's why they are such bad investors.

Craigr, I do agree with you about not having a large government. I think many government employees do actually believe that what they are doing is wasteful but they need the job none the less.

I wasn't meaning that the government would directly pay for investments in solyndra or whatever. Instead I was meaning that if the current tax burden and deficit was instead an asset tax, then the lack of other taxes would cause demand to increase such that it then became profitable for the private sector to provide energy for all etc etc. I wasn't meaning more spending. I was meaning change in the type of tax.

stone wrote: I wondered whether it amounted to a sort of de-facto wealth tax. So long as wealthy people engaged in bonkers, leveraged, "30% gain for five years then 100% loss" shenanigans,  then everything would get redistributed as surely as if it was taxed away. It doesn't seem to quite work like that though. Pension schemes and endowment funds seem to have major holdings in hedgefunds. The hedgefund managers themselves are now the wealthy people. I saw something saying that the most popular investment (whatever that means) for hedgefund managers' own money was physical gold.

Some hedge funds do a good job at providing absolute returns (hedging or market timing) which help to cushion portfolio volatility, hence why endowments and pension funds are interested in them.  But trust me, the really great endowments/pensions do not just place their money in some run of the mill hedge fund only to get average or below average performance.  They go after the 1% which give hedge funds their catchet.

There are numerous social, institutional & psychological factors working against the people involved in hedge funds just as there is in the mutual fund industry.  To expect outperformance from just any hedge fund (or mutual fund) belies naivety.  It is a full time job to monitor for those negative influences and is the main reason why funds of funds came about (with another layer of fees).

MG

craigr wrote: Many that made lots of money usually did it by taking concentrated risks in running their own business, concentrated stock positions, etc.

The problem is that they translate their acumen in running their business as meaning they are smarter than average investors. A lot of the investments offered to those with high net worth are sold with this spin. Terms like "exclusive" and "sophisticated investors only" make it seem more elite.

But again, these folks get the worst investments because you make more money fleecing 100 millionaires out of their money than 100 normal people. I have seen this repeatedly happen in the start-up world when company goes IPO or is acquired. The newly minted wealthy are preyed upon by the financial industry very aggressively.

Let's just say that many of the new Facebook IPO employee millionaires are not going to remain that way within five years.

Watching this exact of behavior pan out is what led me to the bogleheads  thread you all had going, by the way. I was desperately seeking alternatives.  Thanks again.