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Buffett’s 10-year bet with ted sides, a partner at ProtegePartners, is mentioned in the latest buffett letter to shareholders 2017.
Since January 1st 2008, Brazil has been betting that the s&p 500 index fund will outperform hedge funds. Ted sides, a hedge-fund manager who earned a 95% net return after fees from 2002 to 2007, took the bet and picked five hedge funds that he expects to surpass the s&p 500 within a decade.
A decade, a bet
In the letter, Mr. Basu’s summation of the 10-year bet goes like this:
I bet on two things:
(1) & have spent For the sake of money. Win a big prize to donate to the Omaha girls rescue society.
(2) to promote buffett’s view that investing in a passive s&p 500 index fund will yield better returns over the long term than most professional investors. No matter how well the hedge fund market is doing, or how much money the fund manager makes each year, passive investing can still beat you.
In the United States, investors pay huge fees to investment advisers each year and are charged several layers of fees for the assets they acquire. Prote ́ ge ́ Partners selection of 5 ‘fund is no exception.
It has a stake in more than 200 hedge funds, and the managers of the five FOF funds will be able to switch portfolios at will over the next decade. The incentives for these funds are also attractive, from FOF managers down to the bottom of the hedge fund managers, as long as the performance standards, get a big bonus is necessary.
General market inertia rises, fund rises more appropriate, money is divided naturally much. Even if the funds lose money, fund managers can still cross their legs and count their money happily. Why is that? Even the worst performance was cushioned by an investor contribution of up to 2.5% in fixed fees.
As a result, many people blame the high management fees for the failure of active versus passive investing.
But you can’t understand Mr Buffett’s vision if you focus on the outcome rather than the deeper logic behind it. Let’s first understand what these FOF funds have experienced in the past decade.
Ii. Investment process analysis
Here’s how the bet ended up:
Source: & NBSP; In buffett’s 2017 letter to shareholders, five FOF funds and the s&p 500 fund’s performance in a 10-year bet
(1) according to warren buffett and Prote ́ ge ́ Partners convention, the name of the 5 ‘fund will not open to the public, but each year from Prote ́ ge ́ Partners get annual audit report;
(2) the performance figures of fund A, B and C on this table were slightly revised later, while fund D was liquidated in 2017, so its average annual return was based on the performance of the previous nine years.
It is interesting to look closely at their track record over the past decade to trace the five hedge funds that have been beaten to the ground.
All five FOF funds are off to a good start. You may feel sorry for them when they hit the subprime mortgage crisis for the first time ever, thinking that this will surely ruin them. But don’t forget it’s a competition with index funds. This is a good thing for them.
Market into the financial crisis, the situation presented is a stock into the dog, capital loss, low trading volume, the most intuitive embodiment of course is the index, so index fund at this time the most passive. And active fund can reduce storehouse flexibly. Hedge funds, as we have seen, triumphed in the first round in 2008 in earnest.
As can be seen from the figure above, in 2008, hedge fund E suffered the most (-30.1%), while hedge fund A (-16.5%) suffered the least. The s&p 500’s pullback over the same period was huge (-37%). The result is not to fall? What are the essential differences? !
But this is in experience financial crisis, drop is won less, hedge fund can have such achievement is at that time how many passive fund envy!
But after the U.S. economy recovered, the s&p 500 index fund gradually gained the upper hand. Although it still foolishly held on to its original stock, the world has changed.
Starting in 2009, the longest bull market in U.S. history (note! This is when active investing begins its most underperforming phase. Add to this the fact that quantitative easing has disrupted the historical pattern of asset performance, and few funds have outperformed the index since.
In the years since, hedge funds have lagged far behind the s&p 500.
Photo source: FT Chinese network
In 2012, the s&p 500 began to crush strength.
The cumulative gain on the s&p 500 a decade later & NBSP; 125.8%, the best performing of the five. 87.7 percent, worst at 2.8 percent. On an annualized basis, the s&p 500 is & NBSP; By 8.5%, the best C in a hedge fund is only At 6.5%, the worst D is only & NBSP; 0.3%.
Finally, Prote ́ ge ́ Partners, as they are hopeless, in mid – 2017 in advance directly to throw in the towel.
Fund performance is sometimes good and sometimes bad, but the management fee will never fall behind
The so-called FOF (Fund of Funds) originally refers to “Fund of Funds”, which is a special Fund product of special investment Fund and a Fund variety combining Fund product innovation and sales channel innovation.
In the us market, FOF fund has developed for more than 20 years. In this development process, the number and size of funds have increased rapidly.
By the end of 2012, a total of 150 fund companies had issued bonds in the us. 1,022 FOF products with an asset size of & NBSP; $906.26 billion. It can be said that the development of the FOF fund is in full swing.
In addition to historical performance, size and risk, fees are an important factor in a fund. In the us market, most FOF fees are high in the same category of funds.
The average rate of FOF (including indirect expenses) is & NBSP; 2.54%, higher than the average open-ended fund. 0.83%, but this is quite different among different types, with the difference of configured FOF being the largest.
After splitting up the total expenses, we will find that there is not much difference between the FOF fund and the general open-ended fund in terms of distribution expenses. 0.25% & have spent Around, the management fee of FOF is even lower than that of ordinary open-ended funds. However, in terms of indirect fees, FOF is much higher than ordinary open-ended funds.
Image credit: morningstar; Direct and indirect fees of FOF and general open-ended funds
In the case that the direct expenses of the two types of funds are not significantly different, the indirect expenses are the only factor that can explain the difference between the FOF and the general open-ended funds.
In addition, there is an interesting phenomenon that people always think that because the FOF fund adopts relatively more different investment styles, it should outperform the general open-ended fund in a long period of time, but the data tells us that this is just a misunderstanding.
As can be seen from the figure below, in terms of the performance and fees of FOF funds, the investment return per unit fee of FOF funds is lower than that of general open-ended funds. This is due to the weak performance and high fees of FOF funds.
Image credit: morningstar; Income generated by 3 – and 5-year unit fees of various funds
Therefore, there is indeed a problem with the above FOF fund, which is what Lao Lao mentioned in his letter: the five hedge funds invested by Protege Partners can make a lot of money no matter whether the fund managers make money or lose money. That is thanks to a fixed management fee of up to 2.5% a year contributed by investors.
But the bigger problem for the FOF is the 80/20 rule.
Four, twenty eight rule
The Internet is full of people saying that the bigger reason buffett won was because he bet on America’s national fortunes, but why didn’t other hedge funds?
Looking back over the past decade, both the s&p 500, which represents blue-chip stocks in traditional industries, and the nasdaq, which is led by technology stocks, are in the form of long-term slow bull, indicating that every industry is immersed in the atmosphere of a bull market. Hedge funds are largely able to participate, following the usual strategy of diversifying their holdings. Therefore, the pure explanation of the national movement is not persuasive enough.
During this decade U.S. stocks and the background, the rapid growth of funds into the stock market, coupled with the rise of ‘RuRiFangZhong hedge fund industry development, but, according to law “and” outstanding does not increase the number of fund managers, impostors are put forward, in excess of the funds for managers to become return killer, natural is a drag on the overall performance. And this is more reflected in the purchase of a number of funds on the FOF.
5. Frequent trading
Besides because active fund collects fees tall reach “28 laws” outside, it is business is frequent, bring about trade cost exorbitant, and devoured major profit!
First of all, there are many reasons behind frequent trading, but if you ask me, the biggest reason is overconfidence.
68% & have spent Your lawyer will feel strongly that his case will be won; 90% & have spent Stanford MBA students think they are smarter than their peers; 30% & have spent Of entrepreneurs, the probability of success is 100 percent.
Overconfidence, or overestimating one’s own abilities, is a common fault of all people. In the stock market, overconfidence will lead to overestimation of information accuracy, more serious will lead to wrong judgment, thus frequent trading, deeper and deeper.
Frequent trading, investors may indeed because of luck and other factors from the band, do T to earn the difference, but the question is, have you seriously considered the starting point of such operations is to meet the moment of pleasure, or really helpful to your investment returns?
Three lessons from a decade of gambling