The Diversified Blog

A wealth management blog dedicated to creating a long lasting sustainable retirement.

Hedge Fund Math: Heads We Win, Tails You Lose

Here is a nice article written by James B. Stewart of The New York Times:


In a letter to Pershing Square Holdings Ltd. investors this month, Bill Ackman disclosed that through the end of November, the fund had declined 13.5 percent this year after accounting for fees.  The reality is that many hedge funds reap far higher percentages of their gains than that stated in their fee structure. That’s because when they experience substantial losses they don’t have to give anything back.  Investors seem to be finally catching on to the fact that most hedge fund managers share generously in the good times, but are exposed to none of the losses in bad.  READ MORE HERE:


Hedge Fund Math: Heads We Win, Tails You Lose


Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail This email address is being protected from spambots. You need JavaScript enabled to view it. .

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

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Hedge of Darkness

Here is a nice article provided by Jim Parker of Dimensional Fund Advisors.

 

It’s true. Big money can be made from hedge funds. If you run one, that is.  To read the full article CLICK HERE: Hedge of Darkness.pdf

 

 

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Mutual Funds and Hedge Funds – The Survivorship Bias Problem – Returns Are Worse Than You Think!!!

Survivorship bias is a problem with the way that mutual fund returns are reported. Funds that are liquidated or merged into other funds are eliminated from the averages. Only the surviving funds are included when the aggregate returns are reported by the mutual fund reporting services or the newspapers. Understanding survivorship bias is important because it overstates the returns of the surviving funds by 1% or more per year as stated by Mark Carhart and others in their paper titled Mutual Fund Survivorship.

 

Let’s look at a specific example. Say 10 funds are started by a fund company. After 3 years the average annual returns of the 10 funds are as follows:

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Let’s say the market return during this time was 7% annually. Funds A - C under performed the market return of 7%, by a wide margin. Funds D - F performed slightly worse than the market return of 7%. Funds G - J performed the same or better than the market. The average return of the 10 funds is 5.5%, while the market returned 7%. Now let’s say the fund company that created all these funds was unhappy with the performance of funds A - C. They decide to merge funds A - C into funds H - J respectively. Specifically, fund A is merged into H, fund B is merged into fund I, and fund C is merged into J. After funds A - C are merged (eliminated), the records of the surviving funds are as follows:

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Over the Hedge

Here is a nice article provided by Jim Parker of Dimensional Fund Advisors:

 

A recent press article said that with major risk assets looking "fully valued," it was time to seek out alternative investments such as hedge funds. But those thinking of making that shift might want to look before they leap. 

 

According to consulting firm McKinsey and Co, hedge funds and other "alternative" investments will command up to 40% of the asset management industry’s global revenues by 2020 as investors seek them for "safety and consistent returns."1 

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