Using satellite data to count cars in parking lots

Some hedge funds are using satellite data to count cars in parking lots of retailers.

https://newsroom.haas.berkeley.edu/how-hedge-funds-use-satellite-images-to-beat-wall-street-and-main-street/

Bogle on the Buffet Hedge Fund bet

Jack Bogle opines on why Buffet is winning the hedge fund vs index fund challenge.

http://finance.yahoo.com/news/jack-bogle--here-s-why-buffett-will-win-his--1-million-bet-against-a-hedge-fund-manager-200012224.html

Buffett's bet against a Hedge Fund manager

We're in year 6 of Warren Buffett's million dollar bet against Hedgie Ted Seides.   Buffett bet that the S&P 500 index would crush a portfolio of hedge funds hand picked by Seides.

So far, Buffett is correct.  The index is stomping on the hedge funds.

Of course, there's no surprise here.  If you are interested in long term capital appreciation a portfolio of indexed stocks will virtually always outperform a fund that is charging 2/20 and is run by people who think that they are smarter than the market.

What's amusing is that Seides is now coming up with excuses for why it's not a fair competition.  You can read them here. 

Thanks to my accounting colleague, Don for the link.

A tepid defense of hedge funds by Cliff Asness

Cliff Asness of AQR capital has an excellent blog - well worth reading.  A recent posting is called a tepid defense of hedge funds.  

This is a nice article and from it we can draw a few interesting conclusions...

1. Hedge funds look a lot like boring stocks (they have betas between 0 and 1).

2. Based on 1), hedge funds are not hedged.  If they were, they would have zero betas.

3. The positive alpha earned by hedge funds is probably not enough to cover the 2/20 fees that they charge.

4. Hedge funds didn't really provide much protection in 2008.

More on the dark side of hedge funds.

Which begs the question, is there a light side?
http://www.theguardian.com/money/2014/jun/01/hedge-funds-power-wall-street-pulling-strings

How much does the NC Pension Fund pay hedge fund advisors?

The answer is hard to figure out.  While the pension fund will disclose (reluctantly) the fees paid directly to managers - in many cases those managers hire other managers who in turn charge another layer of fees.   This practice is common and indeed the norm in the hedge fund industry where investors contract with "fund of funds" managers.

So how much are these hidden fees?   According to the Treasurer's office fees paid to Franklin Street Partners (an alternative investments manager) by the pension fund were around $2.6 million.  But an ongoing SEANC audit reveals that when fees to the funds managed by Franklin Street partners are accounted for, this total fee bill is $16 million.   And this is just one manager.

A more detailed discussion appeared on Forbes.   And a brief summary of the problem was discussed on WRAL news.

Apparently Franklin Street states they aren't doing anything wrong and this is normal industry practice.  I am sure they are correct.  But that's the problem.  Normal industry practice is all about making Hedge Fund managers rich.

Hedge Fund TV

Brace yourselves -  Hedge Fund TV is coming.  

I won't be letting my kids watch - I don't want to pollute their minds.

Buffet vs Hedge Funds.

In a 10 year, $1 million bet against a hedge fund manager, Warren Buffet put his money on an S&P 500 index fund.  We're now in year 6.  Guess who's ahead?

HT: Rob.

Rising interest rates can hurt alternatives as well...

So says Andy Silton.   Alternatives (PE, Hedge funds etc) rely heavily on cheap debt to juice up returns.  So it's not just bonds that get hurt in a rising interest rate environment.

A couple on the follies of active management.

First: Andy Silton responds to active managers who challenge his assertion that as a whole, they don't add a lot of value.

Second: The infographic that ate Wall Street.

Beware of the "endowment" magic elixir

Great column today in the N&O.

2/3 of hedge funds are dead.

From the FT via Finance at Tepper  - two thirds of hedge funds that are reported in major data sets are dead - they are no longer in existence.  

How can this be?

Simple - hedge funds are started all the time.  If they get off to a good start and make money they are kept open.  But if they don't do well, they are closed down and a new fund is started.   Basically, in the hedge fund industry you get unlimited do-overs as long as you can find money to start funds.

Finance researchers know of this issue which is why they take special care to control for this "selection bias" when they compute returns.   Just looking at the returns of hedge funds in a given year is horribly misleading as these returns are just those of the funds that survived.

A similar thing happens in the mutual fund industry -  mutual fund companies start many funds - and hope that some fraction of the funds will do well.   The badly performing funds get dumped in target date funds which are then sold to unsophisticated individuals.  That's why target date funds are like hotdogs - they are full of the nasty stuff that can't be sold on its own.

Hedge Funds lost money on Nokia.

Apparently many hedge funds lost a lot by betting against Nokia.  They weren't counting on MSFT buying the company's handset business.

A few thoughts:  

1.  Even though hedge funds have the word "hedge" in their title, they frequently don't.   It is very common for them to take one way directional bets.   The idea that somehow hedge funds are doing something clever and special is just not true.

2.  If the hedge funds were trying to hedge, the smart move would have been to be long Nokia and short MSFT.   Of course, it's easy to see that after the event -- but that's the point -- predicting the market is a fool's errand.

3.  The one thing that hedge funds are good at is getting paid to make these bets.   The typical fee structure is 2% of assets under management plus 20% of all gains.   A classic heads "I win, tails you loose" fee structure.

In which I am on TV talking about the NC Pension Fund

WRAL (our local TV Channel) recently interviewed me for a segment that they did on alternatives in the NC Pension Fund.



The important takeaway is the initial graphic showing the explosion in fees paid by the fund. This is my main concern - as I have said before, fees destroy returns.

Josh Brown doesn't understand why people invest in Hedge Funds.

And neither do I.   Here's Josh's rant - in his classic style he doesn't hold back.  

But I fully agree with him, and I even spent time this summer trying to prevent the State of NC from increasing its allocation to Hedge Funds in the State Pension Fund.   I testified in front of the House Finance Committee and also met with the Democractic Caucus and Phil Berger (the Senate Leader), but alas to no avail.  Ultimately the bill was signed in to law by Governor McCrory.   Wall Street Investment managers will be $200 Million per YEAR better off from this bill.

Hedge Funds aren't worth the money

Not much of a surprise to me, but apparently a lot of folks still think that Hedge Funds have some kind of magical money making power that also provides downside risk in market downturns.

Actually, come to think of it, Hedge Funds do provide these benefits -- to their managers.

Increasing alternative investments in public pension plans

The NC State legislature is considering increasing the pension fund's allocation to alternatives to 40%. As reported in Pension and Investments magazine, the state is also looking to allow the fund to hold on to assets if they exceed the allocation target.  The idea here is to avoid selling assets whose weights have increased because of high performance.

As Andrew Stilton (in his blog) notes, increasing the allocation to alternatives may not be such a great idea.

The problems are pretty simple:
1. Alternatives are very expensive - they have fees that can easily exceed 2%
2. The fee structure is such that you pay higher fees when performance is good, but you don't get a fee refund when performance is bad.   From the manager's point of view this is "heads I win, tails you lose".
3. Alternatives are very illiquid.
4. There is no free lunch in terms of performance.  To think that you will get higher performance from alternatives without some additional risk is pure folly.
5. Did I mention that these investments are expensive?

I personally think that relying more on alternatives is the wrong approach - a more conservative approach that focuses on traditional assets while paying the lowest fees possible makes more sense.

Underlying this move is a problem that plagues all state pension plans - that the expected return is set too high.   Given that long term bond rates are less than 2%, there is little chance that most funds will achieve their return objectives which are typically in the 7-8% range.   Of course the other options (higher taxes, higher payroll contributions, lower benefits) are all politically unacceptable.  (I've blogged on return assumptions in the past here.)

Incidentally - Stilton's blog "Meditations on Money Management" is excellent - highly recommended.





5/7/13:edited - to note that the legislation hasn't passed the house yet.

An insight into prop trading and risk management

Quite interesting..link

Pension fund risky bets fail to pay off.

Pension Funds are increasingly chasing risky bets to try to hit return targets.   These investments are frequently highly illiquid, expensive, and as it turns out, not that high returning.

The shocking quote:

The $26.3 billion Pennsylvania State Employees’ Retirement System has more than 46 percent of its assets in riskier alternatives, including nearly 400 private equity, venture capital and real estate funds. The system paid about $1.35 billion in management fees in the last five years and reported a five-year annualized return of 3.6 percent. That is below the 8 percent target needed to meet its financing requirements, and it also lags behind a 4.9 percent median return among public pension systems.  (emphasis added) .

If those numbers are correct, then the State of Penn is paying more than 1% in fees per year.  That is appalling mismanagement.  (I say "if" because I can't believe that they are that bad).

This isn't just a problem for Pennsylvania.  My own state of North Carolina pays close to 0.5% a year in fees on its $75 billion pension fund, which while not as bad, is still a pretty terrible waste of taxpayers money.

What good are hedge funds...

Marginal Revolution has a collection of links on the topic.  

One argument is that hedge funds are valuable because of their volatility reducing properties and not their ability to create a raw alpha.   It's an interesting view point, but in that case, should the fees be based upon the ability to post positive return with low covariance to the market?

In another post, MR links to an article that claims that Hedge Funds have lower return volatility.  I'm not entirely convinced about this because hedge funds don't have to post prices continually.  If I recall, they often can self report fund values periodically which would serve to smooth their volatility (but I might be wrong on this).