Thursday, January 8, 2015

The Perils of Trying to Time the Market III

I just read an article about a big alternative mutual fund that is facing redemptions due to poor performance last year.  And it got me thinking again about a recurring theme on this blog about the perils of trying to time the markets.

I know it's preaching to the choir here, but it is something I am always thinking about.  And this got me thinking about risk overall.

As I was reading the marketing material and articles about this particular fund, I realized how hard it must be to run a fund with the purpose of earning equity-like returns but with lower volatility and smaller drawdowns.

You Have to Be Right So Many Times
Many of these funds take a completely top-down approach to asset allocation.  For example, they will look at the economic outlook; interest rates, inflation etc.  And then from there, they have to choose investments that will benefit from and get hurt by the trends in this outlook.  They have to choose how much to allocate to each investment/trade, and then they have to time it well.

That's a lot of decisions they have to get right.  For example, just on the outlook itself, how hard is that?  We all know how accurate economic forecasts are.  How many people last year predicted higher interest rates?

What are the odds of getting that right?   So that's decision number one.

And then you have to go and find investment ideas that fit that particular theme (rising rates, higher inflation, for example).  I guess you can just go and find the stocks or investments that are the most leveraged to these particular factors and not care at all about management etc.  Or you can pick the best managed companies in the respective sectors.  Or maybe you want the highest cost producer to maximize operating leverage, or the most levered company for maximum financial leverage.  Or maybe a combination of both.  Or you might want the lowest cost producer (but you may get less bang for the buck if you are right).

Or you can go out and look for the things that will be most hurt by the trends you predict.   See?  This is already getting pretty complicated.

Obviously, you can be wrong about this stuff.  You can get the macro right, but you might pick the wrong stocks.  I remember how people forecast higher gold prices and then bought a bunch of gold stocks and got clobbered.  They got the macro call right (gold prices went up) but got the stock picks wrong (most went down due to higher production cost etc.).

And then you can actually get the macro call right and maybe even pick the right stocks.  But if you are an active manager, you are at risk of getting stopped out of positions that are good at the wrong time.  Even if you make two right decisions,  they might go down far enough to trigger stop losses and push you out before you are proven right.  So you can get two things right and get the timing wrong (investors might flee too forcing you to sell potentially winning positions before they turn) and  lose money.  We all know, the markets can remain irrational for a lot longer than your prime broker or margin clerk will allow you to hold the position.

So think about the many layers of correct calls that an active, top-down alternative manager has to make.  They have to be right on so many levels, it's almost ridiculous.  And they have to keep being right over and over again. (Oh, and as complicated as the above is, think about the fact that they have to think about when to get out.  You can be right on all of the above, and the scenario may unfold exactly as you predict, but then if you don't get out at the right time, you can easily give up all of your gains (as markets reverse etc...)).

That's why people like Buffett ignore that stuff and just try to focus on the two questions that they think they can answer:
  1. Is it a good business?
  2. Is it a fair price? 
If it's too hard, you move on.  Munger has said many times that you only need to be right a few times (or less) in your lifetime to do very well. 

Contrast that with these macro-based alternative mutual funds; they have to be right so many times on so many decisions constantly to keep putting up good numbers.  (I contrast these funds with macro hedge funds as macro hedge funds tend not to be so much asset allocators, but very active, highly leveraged traders.   No macro-based alternative mutual fund will ever reproduce the sort of returns that Soros had in the 80's and 90's, for example, as they were very different). 

These alternative mutual funds sell well after bear markets because people suffered so much that they don't want to experience that sort of pain again.  So they look for people who promise a lower drawdown. 

But anyone who has managed risk professionally knows that you can't really reduce risk in the financial market (OK, well, actually you can by staying away from crappy stocks and not doing stupid things; not overpaying etc.  But bear with me for a second).

Long Term Capital Management was a good example of that.  For many years, they had equity-like returns with lower volatility and low correlation to the overall market.  They were able to hedge out all sorts of risks by taking various long/short positions.  But by eliminating market and interest rate risk, they instead took basis and liquidity risk.  And that's what killed them in the end. 

If you run an options book, for example, you can hedge out all sorts of stuff.  Market makers do this all the time.  They buy IBM calls, for example, and they have to hedge out their delta.  So they short IBM stock against their long calls.  But now they have volatility and theta risk.  So they can short IBM options against it to hedge away their vega (volatility risk) and theta.   Then you might end up with some gamma risk.  You can hedge that out too. 

In more or less efficient markets, the more you hedge away, the lower your returns are going to be (as you are paying the market to take away this or that risk from you). 

So in the end, you might as well just sit on T-bills if you don't want any risk.    That's what happens in a perfectly hedged S&P 500 index portfolio, right?  Buy the index and short futures against it.  Your return will basically be T-bill-like as you are not accepting any risk (well, you are taking futures exchange clearing risk; if a huge counterparty defaults, you can actually lose money even in a centralized futures market without direct counterparties).

So back to alternative portfolios. When people say that they will keep an eye on the economy, interest rates and things like that and promise you that they will use that information to structure the portfolio in such a way to maximize returns and minimize risk, you have to understand that they are not actually reducing risk. 

They are reducing risk in one area and taking risk in another. 

So instead of taking temporary mark-to-market stock market volatility risk, they are taking on macro-forecasting, investment selection, market-timing and other risks. 

The only way they will actually reduce risk is if they own a large, S&P 500 correlated portfolio and then short futures against it.  In that case, your exposure is going to be their portfolio outperformance "alpha".  And judging from how long-only mutual funds usually perform, the expected alpha will most likely be negative anyway.   If the portfolio is not correlated, and the fund uses S&P 500 index futures to reduce market risk, then you have tracking error risk; your portfolio can go down and the S&P 500 index can go up.  You can still lose money. 

In that case, you are better off (if you don't want too much equity risk) allocating, say, 50% to stocks and then just keep the rest in cash.  Sure, your return might be 4%/year (8%/year stock return, 0% on cash), but I bet it would be better than most long/short mutual funds over time, even volatility adjusted.   Why bother with all that other risk?  

So you can't really reduce risk by all of these tactical maneuvers.  You are just trading one risk for another.

All Cash?
Even if you stay in cash, for example, you are replacing one risk with another.  By being 100% in cash, you have eliminated stock market volatility risk.  But then now you are sitting on inflation risk.  If you are an equity investor, there is a risk that the market might not come down to where you like for a long, long time.

I remember reading about a prominent bear that got bearish in 1982.   I think he was calling for a market crash.  The Dow was at 800 in 1982.  And he was right.  The market did crash.   So it was good for him to have stayed out (and short) until then, right?  The problem is, the market crashed from 2,700 or so in 1987.

Staying in cash has some risk too that even if the market tanked and got cheap, would you actually have the courage to get in?  And if you did, would buying in at a 20% or 30% discount (or even 50% off) make up for the time you were out of the market?

Or you can convert your cash to Bitcoins and avoid Fed-and-Congress-destroying-the-dollar risk (which is inflation risk).  I'm sure the technology is incredible.  But then sometimes Bitcoin operations get hacked and the Bitcoins just disappear.  Sure, the Fed can't mess with Bitcoins, but I'd sort of rather have the Fed inflate away the value of my dollars at 2-3%/year.  And if my bank failed, I know I can get some cash back from the FDIC.   The factors that impact the dollar are visible to me to some extent.  If the dollar is devalued, I sort of know why.  I can see the inflation.  I can see the budget deficit.  I can see the Fed balance sheet.

But what about Bitcoin?  If the price of it goes down 50%, what can I look at to help me understand that fluctuation?  As far as I know, there is nothing.  So sure, you are immune from central bank and congressional incompetence, but there are many other factors that I don't understand.

So even for the Bitcoin folks, by getting out of the dollar, they are eliminating one risk but then are accepting another. 

By the way, many view Buffett as sort of timing the market because of the huge amount of cash he keeps on hand.  First of all, we know that $20 billion will be there no matter what; he wants that amount of cash for liquidity (paying out insurance claims etc.).

So when he has $40 billion on the balance sheet sitting there, it's actually just $20 billion that is investable.   With close to $200 billion in shareholders' equity, that's a 10% cash balance; hardly a dramatic market call (plus cash accumulates quickly and sometimes he has to let it build up to get ready to bag an elephant!).  Of course I considered comparing the $20 billion to BRK's equity portfolio, but since we know that Buffett would rather buy whole businesses rather than stocks (and one is not more risky than the other in his eyes) it makes sense to compare it to BRK's shareholders equity.

Buffett's Risk Management
OK, I know most of us are not Warren Buffett, but I just use him as a great example of someone who manages risk in a smart way.  First of all, the difference between Buffett and the rest of the professional investment world is how he defines risk  (This is not just Buffett, of course.  Howard Marks, Seth Klarman and many others view risk differently than the street).  

Buffett does not define risk as beta, volatility, drawdowns or anything like that.  He doesn't care about temporary reduction in the value of something (based on Mr. Market).  He is only concerned with the permanent impairment of value (bankruptcy, for example). 

These two risks are very, very different and one is much easier to manage than the other.  

If one wants to eliminate the risk of temporary reduction in value, then equities is simply the wrong investment vehicle.  Even an investment as rock solid and indestructible as BRK has gone down by 50% a few times in the past.  Any stock you buy can go down 50% or more simply due to the silliness of Mr. Market.

But to try to gauge the risk of permanent impairment is far easier. 

If you asked someone which stock over the next year will or will not go down 30%, the odds that they will be correct will be very low.  I don't think even Buffett would be able to pick stocks that will or won't do that. 

However, if you ask people which companies will still exist in ten years, and will actually be doing more business then than now, it would be far easier.  OK, maybe it won't be so easy.  Who knows where, say, AAPL will be in ten years.  

But however hard that is, it would be far easier than trying to figure out which stocks will not go down 30% in the next twelve months.

So Buffett's risk management is to simply focus on questions he can answer and only think about the long term.  Is it a well-managed company with a good business model?  Is it fairly priced?  It's just two questions, basically, that you need to answer.

Compare that to the top-down macro guy: "What will interest rates do?   We think rates will go up.  If rates go up, will that hurt the economy?  If it hurts the economy, should we own defensive names and short cyclicals?  Should we short highly levered companies and buy cash rich companies?  When should we buy such companies or short such companies?  And when do we cover?  How do we know when we are wrong and when do we have to reassess the scenario and rebalance our portfolio?  When do we admit we are wrong?".   What if we are right and there is a recession?  When do we reverse course and start to cover and go long? etc...  The questions are endless, and most of them have to be answered accurately or else you end up losing money.

With Buffett's approach, you don't care about any of that stuff.  Interest rates go up or down?  Who cares.  The management at these companies that we own are good enough and are financially literate so they will refinance if rates go down and won't borrow more if rates go up.   They are not so overlevered that rising rates will kill them.  What will happen to the stock market?  Who knows.  But we know that we own good companies with good managements so if the stock market goes down, maybe they will repurchase shares or maybe they will find an attractively priced acquisition.   If the stock market rallies, maybe they do a stock for stock deal, or maybe they issue stock to raise capital.

In good times they will do a lot of business.  In bad times they will manage costs and find ways to grow the business (acquisitions on the cheap etc.).  If we own the low cost producer, bad times will hurt us less than others.

So whatever the scenario, you don't care.   Things will work out.

Pzena Commentary
Richard Pzena has talked about the fact that risk of owning equities can be reduced by extending the holding period.   His third quarter commentary updates some figures.

It is an interesting read that most of us understand intuitively, but it's nice to see a study that quantifies this stuff.  Yeah, you might say this is marketing material for a value fund.  True.  But it's still interesting and there is still a lot of truth in it.

Here's the commentary:

Pzena Investment Management Third-Quarter Commentary

And here are some tables from it that are very interesting:

This table is self-explanatory.  Buffett's secret weapon risk management method is simply a long holding period (he has said that his favorite holding period is forever):

While some mutual funds try to dance in and out of markets, hedge or unhedge their equity exposure based on all sorts of things, Buffett simply commits to a long holding period and therefore eliminates all the things most other investors worry about.   As I have said here many times before, more money is usually spent (lost) on trying to avoid temporary losses than the losses they try to avoid (which are usually just temporary anyway!  Their losses are permanent, though).

Hedge Funds
Pzena talks about how hedge funds promise to lower volatility but doesn't even achieve that over time.  Equity volatility can be reduced by extending the holding period, but the volatility incurred by owning a hedge fund is not at all reduced through longer holding periods:

Anyway, I am not all that against hedge funds in general.  When I started in the business, the main hedge funds were Soros, Tiger and Steinhardt (in terms of funds focused mostly on equities).

Today's Funds versus the Legendary Funds of the Past
Not too long ago, Stanley Druckenmiller was ranting about the mediocre hedge funds these days.  He said that you had to be an idiot to be paying 2%/20% to hedge funds with single digit returns or low double digit returns.  In his time, hedge funds were expected to earn 30%+ in good markets and bad markets (well, I forget which figure he used; it might have been 20-30% or 30-40%).   Nowadays, he complained, funds still charge high rates with much lower returns claiming that they have good returns on a risk-adjusted basis.

Well, a lot of this is due to the institutionalization of hedge funds in the past couple of decades.  Back in the 1980's and 1990's, hedge funds were for wealthy individuals and maybe European institutions.  If you had a drink with a hedge fund money raiser, they would have told you that you need to put up 30-40%/year returns (or promise to do so) to have any chance of raising capital. This figure may be lower for fixed income arbitrage and other strategies, though.

But since then, U.S. institutions like pension funds started investing heavily in hedge funds and they actually wanted lower volatility and most importantly, I think, non-correlation to conventional asset classes (basically the S&P 500 index).

Presentations were usually filled with tables showing how a 10% or 20% allocation to hedge funds can increase the Sharpe ratio of traditional pension fund returns.

So I think a lot of this low vol / low return stuff comes out of that.  Plus, I guess many managers realized it's much more fun to earn 10%/year with $10 billion AUM (and earn $200 million/year just in management fees) than to try to shoot for 40-50% returns with $500 million.  If they can get to $20 billion AUM, they can earn $400 million just on management fees.  And if you get 20% incentive fee on a 10% return, that's another $400 million/year.

How many percent return do you need to make $800 million/year on an AUM of $500 million?

And how do you get to $20 billion AUM?  You need the big institutional money; pensions and insurance companies etc.  And how do you get that?  By reducing volatility!

And by the way, in defense of the younger, new generation of hedge fund managers, we have to remember that a lot of those old legends put up those impressive return figures in the 1980's and 1990's (well, Soros and probably Steinhardt did very well in the flat 1970's too).  The younger generation had to perform in a market that so far has been pretty flattish since 2000; that's like 15 years of nothing in the market!

Anyway, I do like some of the hedge funds I talk about here, especially the equity focused guys, activists etc.  And of course Oaktree too.

Wow, this is another one of those meandering stream of consciousness-type posts.  What I wanted to say, basically, is the same as what I always say here.

But I realized there is another way of putting the risk of market timing.

When someone tells you that they will earn equity-like returns with lower volatility and low correlation to the stock market, and they say they are going to do it mainly in the stock market, I think it's a good time to run.

You can't really earn high returns with lower volatility without taking some other risk to compensate.  When someone offers you something like that and they say you will have lower stock market risk (and returns are still going to be high), you have to think hard about what kind of risk they are going to take instead.  Most of the time, they are just reducing one risk to take another kind of risk.


  1. Wonder if Institutions that ask for low volatility realize that they are reducing the option value of their LP status. With a leveraged, geared, or focused fund, the LP value increases as some of the risk is shifted to the GP, which in a sense helps to justify the high fees. I doubt anyone expected the hedge fund fee structure to be viable for these very large funds. The allocators have been completely snookered.

    1. I think they needed lower volatility so they can allocate more capital to a strategy; they wanted it to look more like stocks, bonds or real estate in terms of volatility (but with low correlation to them).

  2. Why do you think this kind of investment approach still has so many assets being managed if it is so intrinsically bad? Is it some kind of sick behavioral appeal?

    1. Well, lottery tickets keeps selling even after years of poor performance for most buyers. Whenever there is a bear market, people will seek out funds that promise not to get killed in the next crisis. At the top of the next bull, people will abandon these funds as it will have severely underperformed the market.

  3. Also, what about GONIX (especially out of the Gotham funds), which promises pretty much to do what you said was very dangerous? It's interesting to me because the very justifiable reason for closing the Formula funds and opening the Gotham funds was to reduce volatility, which Greenblatt said people couldn't handle.

    1. Thanks for mentioning Gotham funds. I was actually going to mention it in the post but forgot. Gotham funds is different as they don't allocate capital based on macro factors. Greenblatt doesn't sit there and try to make macro forecasts and build portfolios around it. The portfolio is built using the same magic formula-type approach but with shorts added.

      And I am usually skeptical of long/shorts too, but again, Greenblatt is someone that has a very good long term track record of actually making money and has written some really good books and I trust his judgement. He was no fan of long/shorts either, but he thinks he has figured it out.

      In Greenblatt's case, he got to doing long/short to try to help individual investors from getting in and out of the markets at the wrong times (which he noticed people did even with the magic formula). So for him, it's been a step-by-step, 'let's-help-the-little-guy' process.

  4. Interesting post. I think some of your questions & critiques are off. We can get into a long discussion about this, but there is one simply way that macro funds (including Bridgewater) can (and do) perform: finding asymmetric bets. i.e. the hit rat may well be low, but the return distribution skewed. There are a lot of ways to get that type of pay off, but that is one key way macro is different from value investing, where it seems like there is a bigger emphasis on the hit rate. I've seen one analysis done within a bank that shows that the average hit rate for its traders were basically 50/50, but they still made money every year. Many profitable CTA funds have hit rates well below 50%, as far as I know. Of course the best guys combine a high hit rate along with asymmetric payoffs, but the point I want to make is that you don't have to be consistently right > 50% or even 30% of the time to make money, which you didn't say in your post but seem to imply.

    And I agree that hedge funds as a whole are not likely to provide alpha going forward. There is simply too much money relative to the addressable opportunity set.

    1. Hi,

      Bridgewater has done well over time. Also, I do know that there are (and have been) some highly successful macro traders over the years, including Soros, Tudor, Moore etc. Some of these guys don't even have to be right 50% of the time since they take such huge, leveraged bets and keep short leases on trading positions. So they can try and and get out of trade ten times in a row for small losses and then finally get it right and hit a home run (more than making up for their small losses).

      What is baffling to many was how some of these guys can be so absolutely 100% wrong in their predictions and pronouncements and yet keep earning high returns year in and year out (at least way back then).

      So it's a little different than what some of these macro-based alternative mutual fund guys are trying to do.

      Anyway, how these macro hedge funds make (or not) money is whole different topic that I might talk about one of these days on this blog.

  5. I wrote something similar about Buffett versus, say, Hussman, a couple of weeks ago, but you said it better I think. I'd love it if you would look at my post, but I understand if you don't have time.

    1. Nice post, I completely agree. It's funny you did an individual stock CAPE. I didn't do a CAPE, but looked at individual companies back in 2011 when bears were saying that the market is overvalued and profit margins are unsustainable. I scratched my head at the time as I owned a bunch of stocks and none of them seemed overvalued to me, and as you concluded with XOM, none of them seemed to have bloated, unsustainably high profit margins. The stocks I put in the table aren't necessarily the stocks I own (I just picked, honestly, a bunch of big, representatitve blue chips).

      Here is that post:

      By the way, I didn't mean Hussman's fund in my post (it was a different one). But I do sort of think he is a really smart guy even though, like you say, I agree he focuses on the wrong, unknowables.

      Analysis of market valuations like that can be highly misleading (as it was in 2000 when the market looked (and was) incredibly overvalued, but there were a lot of attractive stocks individually).

      Also, historical indicators can be very misleading and can evolve over time. Back in the 50's, I think, dividend yields went below interest rates for the first time, and this was an unthinkable, unimaginable event. Stocks were seen as speculative so it was natural to think that they had to have higher yields than bonds.

      Those that sold stocks and bought bonds because of that probably regretted that, and they would never have gotten back in (if they waited until dividend yields got back above interest rates. I guess they can get back in now, though, lol...).

      Also, for many years, I think 4% was the lower bound for dividend yields in the market. Those that got out because of that also never got back in.

      So these big indicators can be useful sometimes, but depending on them too much can really screw things up.

      Thanks for dropping by...

  6. I am troubled by the analysis presented in figure 2. The monthly, 5-year, 10-year returns are not drawn from the same sample spaces and yet we compare their standard deviations. They seem like apple and orange comparison to me (from a statistical point of view). Also, frequency of loss by itself is a misleading metric; what matters most is the magnitude of gain/loss.

    1. The table is compared vertically, I think, and not horizontally, so I don't think it matters that the time span for each side is different. In each case, the volatlility is lower as the holding period is increased.

      I think the data differs due to data availablility. MSCI data may not go back as far...

  7. A little less than a year ago I decided to dabble in the alternative space. I bought AQR Style Premia Alternative I QSPIX and am very happy. I was impressed with Antti Ilmanen's "Expected Returns" and since QSPIX is based on his work...I invested. Wanted to reduce equity exposure and couldn't stomach any more intermediate term bonds. So far so good. Will be interesting how it performs in an equity correction.

  8. Market timing is "perilous" because "someone" says it is. Seems like the investment industry is swinging a pendulum towards dumbing down investors with this " don't try to actively manage / or seek out active management" mantra. This at the very time when a growing population of underfunded boomer aged workers are going to need intelligent approaches and options that produce alpha above and beyond a standardized 7% "target date" return inflexibly provided by the giant "indexing" ideaologists. Our society has made it that we have to rely on the financial and real estate markets for our income needs and have now cornered us into using certain "products".

    1. Thanks for dropping by. You raise good points and I understand your skepticism. But my opinion is hardly based on what "someone" says. Well, Buffett, Munger, Greenblatt and all of the superinvestors of Graham and Doddsville and many others say it, so to me, that counts for a little bit more than just "someone" says so.

      But of course, we don't just blindly listen to anyone however much we admire them. My whole career has been on Wall Street and I can tell you honestly that I don't know anyone who has successfully timed the market over time. I've read many, many newsletters over the years too (mostly when I was at a hedge fund; I don't subscribe to timing letters) and have seen nobody do it consistently (contrary to many claims).

      Buffett has also said that in his more than 50 years in the business, he hasn't seen anyone do it either.

      So this is a little more than just "cuz someone says so...".

      OK, there are macro hedge funds that have done well. Say, Soros/Druckenmiller. But these guys made money by more than just market-timing. There were highly leveraged macro traders. In fact, many of their calls on the stock market have been very wrong over the years, but huge bets and wins like the busting the pound more than make up for their misses in other areas. This is not the way the alternative, macro mutual funds are run.

      My first "Perils" post was back in September 2011:

      I didn't cherry pick these funds; they are the only ones that I was able to think of that had a track record over multiple cycles. Here's a follow up I wrote last year:

    2. Oops, that was sent prematurely.

      Also, you are right to question what the street is selling. They will try to sell whatever happens to be working (and looking good) at the moment.

      But from having watched the industry for years, the street is more about encouraging "activity". They want to sell put options to hedge, call options to lever up, they want you to sell defensives and buy cyclicals when the economy looks better and vice versa. They want you to buy foreign stocks and funds when the dollar is weak and vice versa. etc.

      The biggest proof, though, is where is the Graham and Doddsville of market timers? Buffett can point to a bunch of people who do what he does and have done well over decades and through cycles.

      But who are the market timers that have proven over decades and through cycles that they have done it well? And where is that group who did the same thing with good results?

      Believe me, I have been looking for someone since early on in my career and I can't find any! Most of what I find are more similar to the funds I show in my previous "Perils" posts.

      What typically happens is that someone calls a turn correctly and becomes a star, raises tons of capital and never does well again. Or sometimes someone calls two or three turns correctly and are treated as heroes only to go on to never be right again. I can name a lot of names (if I include funds, newsletter writers etc...) but won't bother. We can all remember the stars that "called Black Monday" or called the 2000 internet bubble crash or called the financial crisis etc...

      So if someone wants to invest in a fund that sounds really too good to be true, remember that it has happened many times in the past with similar results; I've seen it over and over again.

  9. "What is baffling to many was how some of these guys can be so absolutely 100% wrong in their predictions and pronouncements and yet keep earning high returns year in and year out (at least way back then)."

    U need to read the "real time experiment" part of Soros's first book, Alchemy of Finance. In it, he generates a something like a 120% (going on memory) return in less than 18 months. There is a key part where he states something like, "I find it odd that all my ideas are wrong, but I am still up significantly". That is not an exact quote either, but if u read it u will identify it. That segment of the book teaches allot about how macro trading works.

    1. Hi,

      Yeah, that was one of my favorite books early on in my career. Rem (can't spellit) of a Stock Operator, Market Wizards 1 and 2 were all bibles in my world.

      I also did work at one of these big, legendary shops and saw up close what goes on, so I have an understanding of how that works.

      Maybe I will make a post about that at some point.

      But let's put it this way; those guys operating very, very differently than the top down, macro-based mutual fund guys. Most of those guys have performance based on whether they were bullish or bearish the market (hedged at the right time, unhedged at the right time). They can't make the Soros-like British Pound bets etc... No way they can get that sort of exposure/leverage in a mutual fund structure.

      If you did take one of the great traders like Soros or Druckenmiller, and then told them to make money by owning a long portfolio of stocks and then hedging according to their market views, I am 100% sure they would have underperformed the market. They would no way be able to outperform if that was their basic strategy.

      Similarly, if you told Buffett to pick longs and shorts based on what he thought stocks in the S&P 500 index would do, I bet he too would do much, much, worse than the market. This is why Wall Street analysts are wrong in aggregate. If Buffett had to say, "buy", "sell", or "hold" on every single stock out there, he would do no better than Wall Street.

      The key is, he doesn't have to do that!

      And the key with macro hedge fund traders (as opposed to top-down market timers; which are two very, very different things!) is that they don't have to be right all the time, and when they have a view, they can take a massive, leveraged bet and then stay out the rest of the time.

      market-timing mutual funds have to be right all the time because they are always long, flat or short. They don't have other options like the macro trader hedge funds do.

      Anyway, thanks for dropping by! I do get it.