Don't be so sure.

"Affordability ratios were in-line, and participation in the market was available to a wider audience- doctors, lawyers, media, etc..."

Hey do you know if this data is available anywhere? I doubt incomes have changes much, so likely we need to see 2002 levels to see 2002 affordability ratios? The inflection in the sheer number of hedge fund employees came after 2002...I'd guess around 2004.

SAC was down 11% thru September, could be better or worse since then. Stevie tends to fire people who lose money, and quickly. He is the ultimate eat what you kill manager.

See: http://dealbreaker.com/2008/10/dear-investor.php for some hedge returns thru September.

Down 11% for 2008 will be good for a hedge fund, better than the average of down 18-20%. Which still beats the hell out of crappy index funds with low fees that lost 37%.

Who cares about fees? What matters is what you get, not the manager. Jim Simons charges 5 and 44, and last I heard his Medallion fund was up 80-90% this year (net of those fees).

Right, fees shouldn't matter if you compare returns and drawdowns net of fees. That said, hedge fees are probably too high, mutual fund managers should be paid like government employees, Stevie Cohen is still great, technicals do in fact matter, asset allocation is more important than stock selection, and JGR should spout less and listen more...With modern in the convo, that makes four investment professionals. Modern, people found year-end data that SAC flagship was down 13% thru November...and they typically play Dec pretty conservatively.

"who care about fees" umm, you must be a hedge fund manager to make an asinine comment like that. if the MANAGER cares about the fees (which he obviously does or he wouldn't charge them) then the CLIENT should care about the fees. i am a hedge fund manager myself and even i can't pretend that fees don't matter. that's just the dumbest thing i've ever heard.

and before you go off attacking index funds you have to look at the relevant index funds. that is, index funds are only relevant compared to active management in their asset class. s and p index funds obviously tanked this year. but how about indexes of government securities? i dare say those did pretty well. you have to compare the proper index funds to the proper actively managed strategies or you are comparing apples and donuts.

and let's not forget: CASH was just about the best investment you could have this year, and you don't need to pay a 2% management fee and risk your capital in order to get it.

Haha after proving nothing and embarassimg yourself with your lack of financial knowledge you list off all your statements as fact. Oh I've enjoyed this one rhino. Enjoy that -13% return!

I agree with modern, that if you net out the fees and make comparison... Maybe 'who cares' is too flippant. I just think the net of fees risk/return is what matters most. With this clarification, I would doubt its the dumbest thing you have ever heard. I didn't attack index funds, I attacked mutual funds. With this other stuff, you are agreeing with me that asset allocation is most important. Clearly being away from stocks in cash/gold/treasuries was the best decision this year, and it was an asset allocation decision, not a security selection decision. THAT SAID, its the rare hedge fund that makes the asset allocation claim to its investors. Fund of funds are supposed to do that...and they did it poorly this year as well... As have individual wealth managers...I can attest to that in consoling friends and family with way too much equity for their age.

JGR, you misspelled embarassimg.... Your cardinal sin. I'm not a sac investor but know enough to view the return for 2008 in the appropriate contexts.

rhino,

you can't justify asset allocation as more important than stock selection by making a retrospective analysis. yes, being in cash would have been great. but then again, investing all my money in walmart would have been great as well. retrsopectively i can make stock picking look brilliant even in a year like 2008.

i knew a guy who made a hundred million dollars selling animal parts to pharmaceutical companies. then he turned it into half a billion by investing in the pharma companies. he only knew pharma, so he only bought pharma. he didn't "asset allocate," he invested in what he knew and held on for the long term. another guy (Warren buffett, who you wrongly believe inherited a lot of money) has invested in US value companies for fifty years and become the richest man in the world. one of my clients made a huge fortune selling ham and processed meats. then she made a second fortune getting involved in private equity deals involving meat processing businesses.

some people make money stock picking, some make it asset-selecting. most people trade and move money around and never do as well as the indexes. that's the reality.

the data suggests asset allocation is more important. when your examples did what they did plays a lot into it. people also concentrated in financial stocks or Bernie Madoff scheme. value investing works over time, no doubt. a big part of it is sector allocation to cyclical weak opportunities. thats a combination of both in a sense.

Hi all . . . newbie to Streeteasy here. Reminds me of Urbanbaby site when people were all trying to get their kids into preschool/kindergarten although I'm guessing that this site is male dominated and that one was decidedly female.

W/out looking to get flamed I'd like to ask a question - from millersamuel.com I've learned that the average price per square foot for a 4 bedroom co-op apartment on the UWS since 1989 is $1062.68.

But this includes 15 CPW. Since the site only works by neighborhood I can't block that building out. But if I don't use the years that 15 CPW has been on the market I come up with $925.88 per square foot.

The site doesn't have any 2008 data on it yet.

So here's my question . . . what % discount ought I to be using when trying to price an apartment I'm looking at?

Any takers?

liquidpaper,

15cpw is a condominium building. it would not be included in your universe of coop prices, and it would have no impact on the average.

happyrenter - Great catch - and you're 100% right. Tku (very much). So scratch the last para of my original post, and using $1062.68 (call it $1100) as the average price since '89 what % per square foot would you think is applicable in the current environment. I realize that it's building & block specific when talking about individual properties, but as a back of the envelope thought - thanks in advance to all & esp. to happyrenter for the catch above.

happyrenter,

You claim to be a hedge fund manager, yet fees matter more than returns to you? To be honest, if I couldn't charge an incentive fee, I'd shut down and play golf, it is simply not worth my time and effort. Last year I pretty much worked for free, and likely this year too, until I get my investors back to their high water marks. That is the beauty of the system, it rewards PERFORMANCE, not ASSET GATHERING. I benefit when I do well, I suffer when I don't. Compare that to mutual fund managers who get paid large sums for losing money. Hell, they can get big bonuses for losing 30% this year if they beat their "benchmark". What a joke.

If a manager can't produce good net returns (and very few hedge funds can) then I agree, they shouldn't be in the business, period. It is all about RETURNS, not fees.

When you buy a car, do you buy it from the place where YOU get the best price, or where the DEALER gets the least profit?

A mega-wealthy guy I know who has invested in hedge funds for 20+ years says he is HAPPY to pay big incentive fees, because that meant he got even BIGGER profits himself, as the bulk of the profits go to the investor. What part of that math don't you get?

Maybe you should invest with Bernie Madoff, I hear he doesn't charge any fees. Stay away from Jim Simons and his 40% per year net returns, at 5 and 44 his fees are too high!

modern:

you said "That is the beauty of the system, it rewards PERFORMANCE, not ASSET GATHERING. I benefit when I do well, I suffer when I don't."

2% of $250mn is $5mn - the average hedge fund with $250mn under management doesn't have $5mn in associated costs per year, and the typical $1bn sure doesn't have $20mn in costs.

I think we'll see 2 & 20 go away for the most part. I think we'll see something like 1 & 10 or 1 & 15 become the norm. To be sure, those few funds that have consistently performed will be able to continue to charge their full freight, and in some cases more.

There was a Bberg article yesterday that said that hedge funds had $1.9trn in AUM at their peak. They're starting this year with about $1.1trn. I'm convinced that not all of that was mkt related losses, money has lest the asset class, and some of that has to do with fee structure I believe.

I agree 2 and 20 is going away but that was a recent invention started by greedy Brits anyway. Traditional long/short equity was 1 and 20 until recently. And the vast majority of hedge funds are under $250 million in assets, though most of the AUM are with the billion$+ funds.

I think what is really going away are the billion$+ leveraged hedge funds who invested in illiquid assets and then halted redemptions. I suspect most of those, including many big names, will be gone within 2 years.

And FoFs, don't get me started on those. Down 20%. Their entire business model (we can't lose money because we are diversified) has been blown up this year, followed by the "we do extensive due diligence" argument which Bernie Madoff just killed.

Hedge funds will go back to what they were, investment vehicles for high net worth individuals backing smart managers they know.

I'm an unhappy renter but what choice do i have??? Pay $450 for a studio..it's nuts...I keep renting and paying and paying.

Rhino-

A bit dated (through '05) , but a good look at affordability levels in NYC from earlier in the decade

http://www1.law.nyu.edu/realestatecenter/documents/SOC2006FINAL_000.pdf

Julia, what part of town are you in? How long have you been in your place? What do you do for a living?
I feel your pain.

More recent version:

http://furmancenter.nyu.edu/documents/SOC_2007_Final_001.pdf

"rhino,

you can't justify asset allocation as more important than stock selection"

Uh, actually he can. My sense is you have little/no formal training in asset mgmt. Something like 90%+ of your has to do with the asset class you pick, not the individual assets in that class. R2 and correlation coefficients tell the story.

Thanks Admiral. I get such boldface financial misconception thrown at me sometimes on this site that I almost want to dust off the old textbooks to make sure I am not remembering it incorrectly.

"Funny that happyrenter, aj202, and myself - all people who manage money for a living - realize that in context and given the strategy, that -13% is a good to great 2008 performance"

That's exactly the problem. Of course it's great performance from the manager's point of view, since you get to collect the management fees (not the carry), and stay in business, unlike the guy who lost 40% and probably doesn't. But from an investor's view, you lost 13% of their &(^%ing money, nothing great about that. Yes, comparisons to a benchmark are relevant, but so are comparisons to doing nothing - i.e. cash. This is the same flaw as an RE agent saying that your best alternative when lowballing is to have another property in mind, when in reality, your best alternative is to stay on the sidelines.

"newbuyer99..as a frame of reference, how much would you and your wife be able to spend? far from scientific, it might be some insight into where prices need to fall to pull back buyers outside of the finance industry."

I am on the buyside in finance (my wife is not, but makes as much/more than many people in finance our age), so we are not a good data point for affordability metrics for people outside finance.

We're both in our early 30s, make more combined than most couples our age we know (and more than your hypothetical couple), and yet would still have to stretch to afford a real family apartment (1800SF+) in a good area. If we listened to the "borkers", we would've either stretched a lot in 2007-2008, or bought a smaller apartment with the hope of trading up later. Both very risky propositions, and I consider having those options as being priced out.

newbuyer, ya think that maybe one year of -13% is the cost of being invested in an equity strategy in the year 2008? if you are going to compare it to cash, i think maybe you need to compare it to cash over a longer time period than one year. your analogy to real estate is very flawed. if you think investing in equities through a hedge fund means never having a down year, i think you are mistaken. again, that would be a function of the mandate and the expectations set with investors. in this particular case, i think anyone invested with SAC who thought -13% was out of the question in a year when the market was down 40% did not understand well enough what they were getting into. and remember, 20% of -13% eats through the 2% management fee, so they in fact, are not getting paid anything in 2008 for this performance.... actually if they have that 2 and 50% scheme, they are actually refunding a piece of prior year performance.

ummm rhino: 20% of -13% eats through the management fee? Huh? Last I checked you get the management fee regardless of whether you make an incentive fee or not. They essentially made 2% off of assets for delivering a down 11% performance.
Thats the dirty little secret of the hedge fund industry (imo not an industry at all but a compensation scheme disguised as an industry). They (as an asset class) generate no alpha, yet charge super high fees. For the billion$+ funds, you can be sure, that the manager will get rich no matter what the performance is, and how long he lasts at it. Sure there are funds that have done exceptionally well for their investors despite the fees, but they are the exception not the rule.

Admiral,

you took a chopped up, selective, and misleading quote and then argued with something i didn't say. and then rhino, charming as ever, jumped in to thank you for agreeing with him. if you had copied my entire sentence (let alone my entire post) instead of one part of it, you would have seen this:

"you can't justify asset allocation as more important than stock selection by making a retrospective analysis. yes, being in cash would have been great. but then again, investing all my money in walmart would have been great as well. retrsopectively i can make stock picking look brilliant even in a year like 2008."

there are arguments for focusing on asset allocation, and there are arguments for stock-picking. if you are a great asset allocator, then that's what you should do. but if you are a great real estate investor, should you try to "asset allocate" into gold? you will lose your shirt. my "training" in asset management certainly doesn't come from following the conventional wisdom.

modern,

where did i say that fees matter more than returns to me? i certainly never said anything of the sort. i said that fees MATTER to me. And clearly they matter a hell of a lot to you, since:

"To be honest, if I couldn't charge an incentive fee, I'd shut down and play golf, it is simply not worth my time and effort."

what gets you out of bed and to the office in the morning is your fee, ergo you....care about your fee. so i am not sure what you disagree with me about.

as for rewarding performance, i am all for rewarding performance. the question is not whether performance should be rewarded, but how much. and in your subsequent post you basically agree with me: you say that 2 and 20 will disappear and that we will got back to a world of 1 and 15. most funds will shut down, and we will be left with a small industry with some outstanding people pursuing exotic strategies, which is what hedge funds were till a few years ago. if you believe most funds will shut down, and most funds will have to lower their fees dramatically, then you must agree that hedge funds as they currently exist are for the most part a bad deal for investors.

so, what exactly are we arguing about?

rhino,

i am not in favor of investing in cash over the long term, but your argument with newbuyer is somewhat disingenuous. most 'equity strategies' have been beaten by cash over the past TEN years, not one year. that's a pretty reasonable time horizon, isn't it?

Happyrenter, I don't doubt that most long-only strategies have been beaten by cash over the last 10 years, but not most long-short equity hedge funds. If that is so, then yes, long-short hedge funds would suck. With hindsight, yes, pointing out the right strategy for 2008 is pretty worthless - either with regard to security selection or asset allocation. However, that does not change the historical fact that asset allocation a bigger contributor to returns than security selection. Admiral is right, it has to do with the fact that securities in a single asset class generally have a pretty high correlation.

Bfgross, if you lose 13% in a year as a hedge fund then you have a clawback in the following year of 2.6%, which more than offsets the 2% mgmt fee. So in a sense, you have earned nothing. But yes, technically you do get paid the mgmt fee. Again, I love the hedge fund bashing. What an awful awful industry. Never mind that they have outperfomed long-only strategies net of their too-high fees this year by a country mile. At the same time, they had not underperfomed long-only strategies over the prior 10.

PS: Happyrenter, the idea that people should stuff all their eggs into their chosen field in terms of their investments - that is pretty scary. Should they put 100% of their assets into their company's stock because that is what they know best? That's an awful risk profile.

rhino,

you keep saying 'they have this' and 'they have that' regarding hedge funds without providing any data to back it up. what universe of hedge funds are you considering? are you weighting for size? are you accounting for survivorship bias? what your saying could be true according to one set of parameters and blatantly false according to another. this is the problem with asset allocation--who decides what constitutes an asset class? let's look at investment vehicles: are hedge funds a class? or hedge funds of a certain type? or hedge funds of a certain size? or hedge funds following some type of strategy?

rhino,

somehow warren buffett made over $50 billion investing only in industries he understands. no: clearly people should not always and in all circumstances invest only in what they know best. but neither should they always and in all circumstances invest in hedge funds, or gold, or road bonds, or nyc residential real estate. there is not one way to do it.

that said, i do think it is generally a good idea to invest only in what you can understand and to let other people make money in areas they understand. a sure way to lose your shirt is to invest without knowledge and understanding. and if you do understand an area, you can often make a lot of money even in a struggling industry. take publishing: a good friend of mine did a magazine publishing roll-up and made tens of millions of dollars, even as the magazine industry was in a major downturn. i am certainly not against asset allocation or diversification, but i am very much against the conventional wisdom that those are always the best strategies, or that they have been 'proven' to work better than other strategies. that's not the case.

Happyrenter, those are all great questions... The thing is, that a ton of work to track all that down. Feel free to have at it if you like. I may be wrong, but I am pretty confident that an equity long-short index defined in a reasonable way has outperfomed cash and stock mutual funds over the past ten years. If it has not, then I stand corrected. My basic point remains that -13% is a reasonable loss to an equity strategy in 2009...and that is isn't that harsh an indictment of SACs value added.

"a good friend of mine did a magazine publishing roll-up and made tens of millions of dollars, even as the magazine industry was in a major downturn" - Are you talking about investing, or are you talking about a venture he approached as a job? Very different.

Warren Buffett didn't focus on one industry like your prior examples. He focused on many of time - primarily cyclically depressed ones. Its way more likely someone can use simple market P/E rules to be in or out of the stock market as a whole and save themselves some pain then to duplicate Warren Buffett's stock selection performace. Its no more difficult than taking a pass on real estate at 20x rent.

It is proven that variation in returns is due in greater measure to asset allocation than to security selection. That is not saying it is an alternative strategy to be persued without regard to security selection. That is just fact. Being in or out of stocks is more important than which stocks you pick. Period.

rhino,

i never disagreed with that one point, but to turn a defense of one fund's performance into a defense of the entire hedge fund industry is unwarranted. personally, i have no desire to determine the overall performance of all hedge funds because my personal hedge fund investment is 100% in my own. my only point is that a lot of BS is thrown around about how great hedge funds are. a great manager is great, whether he or she runs a hedge fund, a mutual, fund, private accounts, or anything else. there are very, very few great managers. hedge funds are generally bad for investors because the fees are so much higher and there are still very few talented managers. but sure, if you can find a manager who justifies his or her enormous fees over the long term, then good for you.

"a good friend of mine did a magazine publishing roll-up and made tens of millions of dollars, even as the magazine industry was in a major downturn"

Is that CurtCo? - Robb Report, et. al.?

I would defend the hedge fund industry but only relative to the mutual fund industry. Also, I would not argue that fees in many if not most cases are unjustified. Out of curiousity, how do you justify your fees? Are they standard? Are your returns outstanding?

wait--you think that you can replicate warren buffett's results as easily as taking a pass on real estate at 20x rent. wow, i wonder why i have been wasting all this time running my hedge fund when all i needed to do was use "simple market P/E rules" and i'd be well on my way to a $50 billion fortune. gosh, if those rules are so easy then why is it that most active managers do worse than randomly throwing darts at a list of public equities? are they completely illiterate? it's a wonder we don't ALL have $50 billion dollars if it's so easy to do.

as for the magazine roll-up...it was his investment vehicle. investing is his job. so what's your point? investing is my job, too.

This whole thing actually started with jgr and nyc10022 saying technical analysis was debunked by Malkiel. My retort was than SAC and Tudor (greats) beleive it matters. They said SAC at -13% in 2008 was a shitty example. I argued -13% was pretty decent performance this year. Jgr added that he made 5% in the pa this year by being in treasuries, therefore he is an authority on the matter.

Somehow it drifted to asset allocation vs. stock selection. In my view, if you can't take a stab at asset allocation then that individual should not invest. I think what the last 10 years really told us is that autopilot investing is worthless. New money into an expensive stock market is a mathematically bad risk/reward.

i have no need to justify my fees, rhino. i charge them, and my clients are free to pay them or go elsewhere with their business. i certainly don't argue that my fund is some incredible value proposition for them. now, since i am in my 20s and started my fund within the last year, the few clients i actually have (that's an exaggeration, but it's a small fund of course at this point) are mostly taking a leap of faith with me, and i am grateful. but i don't justify my fees, i just do my best.

No I don't think you can replicate Buffett that way. I think they can't. The average investor should just sensibly asset allocate. Yes, I think it is within the average investors competance to avoid new money into a stock market trading over 20x EPS. By analogy, its similar to avoiding buying the coop apartment trading over 20x rent.

Strangely, you add to my point that stock selection is less important than asset allocation by reminding us that most managers fail miserably at adding value through it.

You don't justify your fees, you just do you best. Haha.

but most managers fail miserably at asset allocation as well, rhino. there is no panacea for investing--it's very difficult to do well no matter what so-called strategy you use. ultimately, it is not the investment strategy but the specific investment decisions that matter.

why is that funny, rhino? i don't go around justifying my fees, i don't have a marketing department, i don't spin fantastic tales for my clients. it's like anything else: if i were selling table cloths, would i need to justify the price? no. i'd make the best table cloths i could, and then i'd sell them for the profit-maximizing price.

happyrenter, Rhino, why don't you trade emails and continue your discussion in private.

Never said anything about technical analysis being bunk. There you go Rhino shooting your mouth off again. You make so many bullshit assertions on this thread not backed up by facts. Now you can't even get your facts straight about Warren Buffet. Embarrassing.

Happyrenter what was funny was how adamant you were that the hedge fund industry was overpaid, but when it came time to justify your own fees you took a total pass. That's a pitch only your family trust could love.

"i have no need to justify my fees, rhino. i charge them, and my clients are free to pay them or go elsewhere with their business."

Finally, something I can agree with. People should just vote with their feet if they don't like the fees and net returns.

In your analogy, if they like the table cloths and the price is ok, who cares how much the seller is making?

Modern, you don't think a hedge fund manager should have to pitch? Something fishy about someone who can start a fund in their 20s in the 2008 tape and not have to pitch their investors.

I started my fund mostly with my own money and a few friends, with no marketing, and relied on performance to attract investors, so I think that is a valid approach, though this is a more difficult time to be starting out. Hell, it is a difficult time to be established. There is almost no one to pitch to anymore, HNW investors are hiding in cash, FoFs are facing huge redemptions, and family offices are scared too. Even the idiot Europeans are running away, as they leveraged their hedge fund investments into "structured products" with 3 to 1 leverage and are being whacked hard.

I think "money follows performance". Many funds that started focused on grabbing huge amounts of money first and then had mediocre or worse performance (see Harvard/Sowood and Peloton and many others). So if happyrenter can get through this period and put up some good numbers for a couple of years, he has a chance of attracting money when people are back to investing in hedge funds.

There is a saying this year among hedge funds: "Down 10% is the new up".

rhino,

i am associated with a wonderful fund asset management firm. i worked for them for several years with the understanding that if things went well i would get my own fund. things went well. the model is this: i do the work, they pay the rent, we split all fees 50/50--with a few complications we basically each own 50% of the fund. so i have a bit of a stamp of approval, and they attracted some capital for me and put in a bit themselves.

my pitch is myself. i do all the investment work, i make all the decisions. the funny thing is, now is actually the best possible time to start out in the asset management business. everything has been so beaten down there are great investment opportunities all over the place. but just like anything else, people like to buy high and sell low, so now no one wants to be an investor.

You may be right...or wrong. At 15x 2009 eps of around $60, the market isn't dirt cheap. However, it is as cheap as you and I have seen it in our adult lifetimes. I assume you are a stock guy. And if the market wants to trade to a single digit P/E like the early 1980s then its all going down. I am more of a trader, but with a CFA and an MBA in finance, I do understand and appreciate the investment way of thinking. No one wants to be an investor because investing as you have pointed out hasn't worked all that well in the last 10 years unless you avoided the late 90s and bought in 2003.

no one wants to be an investor because it hasn't worked well in the last year. people have very short memories. believe me, no one was worried about being an investor last summer. the market is extremely cheap, rhino, because you have to remember that that 15x (and where exactly are you getting that?) is on dramatically reduced earnings.

$60-65 is an S&P consensus out there... Bernstein, a couple of others. $60 is dramatically reduced off a credit bubble induced high. Also $60 is 'trend' as calculated by Schiller (better known for RE). Of course no one worried last summer. 15x is not very cheap in a historical context. Sub 10x is very cheap. 15x is actually average.

rhino,

without talking about any of my own investments, check out phil. morris international and then tell me the market isn't cheap.

I am talking about the market... The market is the market and a stock is a stock. What multiple did Phillip Morris trade at in 1981 vs. now... If the S&P want to trade to 600 all stocks are going down. I don't know how you run your portfolio...whether long/short or long bias or what. I do know that the market is trading 15x, earning are trend, not depressed, and the historical average P/E is around 15x. I'd probably rather be in markets with better growth prospects then the US. In terms of growth/maturity, the US is the new Europe.

whatever you say. i don't really invest in US equities very much. but when the best large business in the entire world (that would be pm) is trading at 13x earnings with absolutely no rational basis you know the market is cheap. obviously that doesn't mean it can't go down, and as i said before, since i buy individual securities rather than markets i don't really care about the market as a whole. but it's cheap.

Spoken like a true kid.

I don't check these boards nearly as frequently as rhino and happyrenter, so my replies are delayed, I guess.

Rhino, I didn't say cash is better than an equity strategy over the long term (obviously depends on how long, and when you get in, as hr pointed out). You should certainly have both. However, I don't pay 2 and 20 for cash! Nor do I pay it for my Schwab account, where I can pick my own stocks, or buy index funds or ETFs.

And your statements on eating into management fees and giving money back from prior years make no sense. No carry clawbacks in any hedge funds I know of. Management fees are paid no matter what.

"Happyrenter...2 and 20 is high for sure, but returns are net and the industry as a whole, on a risk/reward proposition still crushes the tired ass autopilot mutual fund industry."

I don't think thats actually the case, per the stats I've seen (this is for all hedge funds), but, more importantly, the numbers for both are TROUNCED by index funds, particularly when you add in risk.

> Spoken like a true kid.

Rhino, aren't you like 30?

Whatever age I am, I know that 15x trendline earnings is no bargain for the S&P.

I'm not sure how hedge funds losing 18% on average in 2008 were trounced by index funds...or how an S&P index fund thats basically flat for 10 years is better than the hedge fund average over the last 10 years. Further, if an equity hedge fund truly hedges in any way, then their risk profile is lower than an index fund.

Also to call the market 'irrationally cheap' because phillip morris is trading at 13x out of context shows a lack of historical perspective...or even the current perspective of high yield trading at double digit yields. The 'kid' basically calls the market cheap because its the cheapest he has seen it, or cared to read about. Cheap is 1980-81 when the S&P was trading at 8-9x EPS.

Sorry but you people don't know how to measure and discuss risk.

> Whatever age I am, I know that 15x trendline earnings is no bargain for the S&P.

Agreed... but I could show you 100 kids that know that...

> Further, if an equity hedge fund truly hedges in any way, then their risk profile is lower than an
> index fund.

Its been years since I've seen an actual hedge from a hedge fund. Yes, long/short, bla bla, there might be a bit less beta, but its generally traded for even bigger risks.

I saw a dutch study where when they looked at long term hedge returns, besides not really beating the S&P after fees, risk adjusted, they trailed by 5% when you looked at portfolio makeup. I'm trying to find the study link, I have it somewhere.

> Sorry but you people don't know how to measure and discuss risk.

Us Jews? Us whities? What people?

Your expertise being in the industry that managed to do the greatest job of hiding it in decades....
Granted, maybe that DOES make you an expert.
;-)

I'm just a 35 year old with some experience in the industry. Don't make me out to be Bernie Madoff. Yes, hedging has been abused...or worse, derivatives have levered risk to support home run bets in a one-way compensation scheme. I'm just a long/short energy equity trader. I think true and honest long/short equity strategies add value vs. an index fund. Who knows. I think the average hedge fund is cumulatively up in the last 10 years and the market is what, flat? Did the Dutch study include 2008 when the average hedge fund was down 18% and the market was down what, 38%? That could skew the results a bit, no?

Fewer kids know 15x isn't cheap than do.

"I don't think thats actually the case, per the stats I've seen (this is for all hedge funds), but, more importantly, the numbers for both are TROUNCED by index funds, particularly when you add in risk."

nyc1022,

I don't think you understand hedge funds or their history and performance very well. You can look it up, hedge funds on average have beaten the indices over the long term (10 years) and have really kicked ass over mutual funds. Net of fees.

With lower volatility.

Google "hedge fun index" and you can find a bunch of different ways to track hedge funds.

Its way more fun to shit on hedge funds and say -20% sucks in 2008 for managers making 2 & 20. And then suggests that hedge funds as a group are way riskier than index funds. In this way, you can use terms like 'risk-adjusted' without actually understanding how to adjust for risk.

"I'm just a long/short energy equity trader. I think true and honest long/short equity strategies add value vs. an index fund."

I agree... if done right. The problem is, the likelihood of someone being able to beat the index is low, but still much lower than the likelihood of an average investor to find the person that can.

> Who knows. I think the average hedge fund is cumulatively up in the last 10 years and the market is
> what, flat? Did the Dutch study include 2008 when the average hedge fund was down 18% and the market
> was down what, 38%? That could skew the results a bit, no?

A huge chunk of the hedge fund reports are prepared by... well, the hedge fund industry. Its like the mutual fund families who close the crappier funds and rate the returns of what is left. Then you also have the "average fund returns are not the returns the investors got" issue coming from timing of returns. There are few objective sources out there.

The dutch study, which I'm still trying to find looked at risk adjusted returns for a consistent basket of funds. Not a self-selected one, which is the problem with most analysis. It showed the hedge funds got trounced. Obviously there are some more consistent "winners", but on average, the dirt said "avoid" for investors. Hell, the guy that pioneered moving institutional money into alternative investments - Swensen - is the first guy to tell you "don't try this at home". And he doesn't just mean people, he means anyone that isn't big and sophisticated enough to be running their OWN models to allocate money to funds.

In terms of your hedge funds "only" down 18% number... again, I think you are talking about self-reported numbers with a "winners" bias. I'm sure we'll get lots of after the fact analysis, and I think you are going to see there were a lot more losers than winners, particularly over the longer time frames.

> I don't think you understand hedge funds or their history and performance very well.

I think I know better than you think... I've actually seen the data, not the marketing.

Here is another one I remember, decent parallel.

They studied PE returns over 20 years or so. The stated returns from the funds themselves beat the S&P by a few points. Great. The study actually looked at the asset sales (which in theory should just match those returns). The number trailed the S&P.

Particularly if you are dealing with not particularly liquid assets, funds can do absolute snow jobs with their "returns". What they tell you you made doesn't matter, what you actually get back does.

And you don't even need there to be a madoff...

A market neutral long/short investor is trying to make a solid, uncorrelated, risk-adjusted reutrn. I actually just got some data from HFRI in email...I guess the number is more like -22% in 2008. I still say, given the sadness of compounded...Being down 20% is worlds away from being down 40% in the market. The reality is hedge funds could be a lot better, and mutual funds are a waste of skin. I worked with a mutual fund guy who outperformed the index by 5% a year on average... but he was a bullish energy PM over the timeframe from 1999 to 2007. Its lucky he was out of the game in 2008 because that 5% would be gone and more because he'd have underperformed by 15-20% in a down market... He was all beta on the way up.

I can make double digits in a market neutral approach.... Problem was in the energy bull market no one gave a shit. I guess they give a shit now because the average energy fund capture none of the bull run. They are down on average on a trailing 3 year basis.

> I actually just got some data from HFRI in email...I guess the number is more like -22% in 2008

Seriously, most of the data is bullshit. You can't ask the hedge fund industry for its own returns any more than you can ask the mutual fund industry for its own. And, at least the mutual funds have specific reporting requirements, so you can call them on their bullshit.

The few objective sources out there note VERY serious discrepancies.

> He was all beta on the way up.

Thats not outperforming then, thats simply taking another risk level (and the resulting returns). The joke is when someone calls it a hedge fund, beats the market 5 out of 6 years, and takes 20% of the difference in the 5 good years for adding no value. You can do this with some basic black scholes modelers... Paying 20% is getting scammed.