Bob says hedge funds are over rated because most of them don't beat the S&P 500. Fair enough but how many of those funds benchmark something else like a bond index, commodities or something else unrelated to stocks. How many are market neutral?
A more appropriate context would be how many do or do not beat their benchmark. From that standpoint maybe they are over rated?
I am not a fan of hedge funds but they play an ever larger role in the markets and though I can't envision a scenario where I would start to use them, that does not mean that we should know nothing about them and simply accept incomplete thoughts like the one Bob tossed out there.
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12 comments:
Roger:
One can't possibly benchmark Hedgefunds to the SP 500. They need to be benchmarked about the return achieved in light of the risk taken. Many PM's at hedgefunds are not allowed to be more than 30% long. How can one benchmark that against an SPX index. And if anyone cares to remember, the DJIA went from 1k to 1k between 1966 and 1982, how would that have benchmarked against today's hedgefunds. And of course in Pisani's assumptions is the fact that the SP 500 will always go higher.
Why don't we hear more folks refer to Sharpe Ratios when assessing portfolio performance? It doesn't seem to make sense to compare any portfolio to a particular index unless the fund manager explicitly states the index is his/her benchmark.
Hi Roger:
I enjoy reading your blog and I have a question for you.
I am interested in investing in a range of emerging markets (more than what VWO or EEM cover). I came across 'Eaton Vance Structured Emerging Market' mutual fund (EITEX and a few other variations). This fund is restricted for purchase only by institutional investors.
Is there any equivalent ETF? How can an individual investor reach those emerging markets not covered by VWO or EEM (or having very low weights - example: Pakistan, Bangladesh, some African countries?).
Thanks for your time.
For having worked for CNBC as long as he has, Bob Pisani demonstrates a severe lack of knowledge/intelligence on a frighteningly common basis. I guess there is a reason he is a journalist and not an investor.
Roger, I'm seeing PSP/private equity etf show up more on asset allocations (touted) as a way to have diversity and low correlations to stocks (it really is the new mantra). PSP's buzz is that it offers us little guys what the hedge fund guys get. You keep current and probably mentioned this one earlier...your thoughts on under the hood appreciated. Personally, looking to put together a group of etfs which fall into a category of "different"...not so precise yet...track and have small positions..in a selected few. I'll be patient to allow data hx and new products to accumulate. Any stab at a group composition, should this interest you, would be of interest to me,as well. thx!
PSP has a much higher correlation to SPX than its components. This only makes sense if they each do slight different, but related things, the various zigging and zagging within brings it closer to SPX.
Frontier markets are tough to access. T Rowe Price has an OEF with some exposure there are several CEFs with various amounts of Eastern European exposure. There are several trust traded in London that can be bought in US accounts like VTOPF that I have written about several times (client & personal holding).
Not a lot of depth to Signor Pissani.
I guess beauty is in the eye of the beholder. Obviously, hedge funds provide a service to the markets and their clients. I see no reason to seek out hedge funds myself, but if these money pools legally operate and keep companies working for the shareholders or equivalents, good for them.
As for the CNBC morning team, a few more info-babes and less lawyer/news reader/bon vivants would improve the entertainment dimension that this medium is supposed to provide.
Anon 10:23:
You might be able to get some info from here:
http://www.etftrends.com/
And,
http://etf.seekingalpha.com/article/20403
And,
http://www.ishares.com/fund_info/equity.jhtml;jsessionid=EGTB3ZDRDYSQ4RJUMTCBBGSFGQ0EOD50?
And,
http://finance.yahoo.com/etf/browser/op?c=etf_em
I would approach any hedge funds with a purely objective screening criteria: Alpha, Beta and Standard deviation. If everything being equal I would choose the highest alpha, the lowest beta and the lowest standard deviation. Highly lerveraged funds would show up with high beta and high standard deviation. Truely market neutral funds will have very low beta but high alpha. It does not matter what benchmarket you compare with. What matters is what is the overall beta and standard deviation your portfolio would be then choose those funds to meet your requirement. Personally my target beta is less than 0.6 but with better than 1 in alpha. If your hedge funds don't provide these data then don't invest in them. I know you also can use OEF's to capiture what hedge funds try to do.
How can you say, "It does not matter what benchmark you compare with." And then say, "What matters is what is the overall beta and standard deviation your portfolio would be then choose those funds to meet your requirement?" Beta is a comparative valuation against a specific benchmark. You might have a 0.6 beta vs. the S&P 500, but a 1.2 beta vs. something like the Dow Jones Moderately Conservative Portfolio Index. Picking a benchmark you want your portfolio to emulate (or not emulate) is very important if you're interested in measuring your progress.
Tom K has the right idea when he refers to the Sharpe ratio being a better way to put returns in perspective, but if it takes more than 15 seconds to explain, it'll never find it's way to CNBC. This reminds me of Roger's discussion of ALPHX last month - all the comments were targeting the expense ratio and the return vs. the S&P 500 and ignoring the success of the fund vs. what it was designed to deliver...
7:59 anon:
"It does not matter what benchmark you compare with" was meant for the final portfolio. For example some people prefer S&P 500 but 3-month treasury +2 points are just fine. The real problem comes from the alpha, beta from the consituent funds. Here you are at the mercy of the data vendor. But when you compare similar funds then they are probably ok. Sharpe or Sortino ratios are useful if you can find them. Being conservative and a holder of Hussman fund I like his idea of using "peak to trough" swing as a measure of risk. For S&P 500, last June's swoon had only 7.4% peak-to-trough, a very low level of risk, historically speaking.
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