This is the same issue with these ridiculously high "guaranteed" returns on DeFi lending.
Any significantly above market returns of any kind are either a scam or have risks that are either not understood or not disclosed.
I'm honestly surprised the hedge fund industry has survived so long and grown so large. In some cases you get to invest in a market you otherwise couldn't access but it seems like long-term returns underperform passive investments in most cases.
ARK is similarly invested in very illiquid positions. Hwang was one of Cathy’s initial investors, and there’s reason to believe they share some similar views. Both are devoured charismatic Christians. An write up on Cathy Wood highlighting her approach to investing: https://www.ft.com/content/a93f4de2-35d2-44e1-a6a1-0000cba0d...
And here’s an article from last year speculating on how ARK’s illiquid positions could lead to a vicious cycle: https://seekingalpha.com/article/4411559-raiders-of-lost-ark...
And a write up from controversial but always entertaining zero hedge: https://www.zerohedge.com/markets/cathie-wood-and-definition...
By definition, the market return is an average, and there must be returns above and below the average. You could say above market returns require taking above market risk, but often times the level of risk you are taking is not known for certain at the point in time you make the investment.
Also, the hedge fund industry's goal is not necessarily to beat the market, it is to provide the highest level of return per unit of risk.
This is every investment, not judge hedge funds. Every asset has a risk profile. Generally speaking, the higher the risk, the higher the return.
US government T-bonds have a low return because they're viewed as essentially risk-free. Put another way: the US government has never defaulted on a debt and that debt is backed by the US government. It's not that a default can't happen but if it does, we probably have larger problems. So low-risk, relatively low return.
Individual stocks on the other hand have much higher risk. So the return can be much greater but you can also lose all your money.
Funds reduce risk by splitting investments across a pool of assets. This reduces risk but also reduces likely returns (both positive and negative).
When people compare actively managed funds (including hedge funds) to passive funds (eg S&P 500 weighted fund), actively managed funds overall underperform passive funds for the same asset classes and risk profile.
That means you compare an equity hedge fund to other equity funds. This also means whenever we talk about average returns we actually mean average returns for that risk profile and asset class.
Agree, but those returns well above average, could be tomorrow's well below average. (And the ones well below average today were yesterday's well above average.)
So it can still be the case that the ones significantly above market and significantly below market are one and the same.
Look at past performance of Mutual Funds. If they peaked and you buy it, you can almost be 100% sure, that it will fall.
I remember Janus' ads running a victory lap about one fund with a >100% return in 2000, only to have ads talking about how to stay strong and deal with "uncertainty" or something after the crash.
So basically you are saying a hedge fund is just optimizing for sharpe.
That is not true. Sharpe is just one way to compare performance at the same level of vol. It's a useful metric but very limited. It tell you nothing about exposure, risk and distribution.
I discussed how hedge funds position themselves here:
Before computers were widespread there used to be niches where outsized returns did exist, but just too small for large professional investors to bother. Like a once a month mis-pricing that you could make a few thousand on, max, due to low liquidity.
Hilariously enough, that’s exactly how the most famous “value” investor Buffet started out: convertible bonds arbitrage. So much for “buy and hold undervalued but very good companies forever ” lol.
He eventually grew out of that niche and became too big, so he had to develop a new image to sell to his LPs/investors and move on to bigger things.
I have a hunch that the hedge funds proliferation in some part is due to the availability of speed and compute. Today you can leverage machines to exploit a million small niches, and lots of funds are doing just that. Tons of mini buffets around, they just can’t grow as big anymore, or at least with much lower frequency.
Your premise is based on funds making a lot of money, which they want to shield from taxes. How do you think they make money? (Caveat: most HFs underperform, but that’s a different issue entirely)
Lose money in the markets to save on taxes? Makes zero sense.
I'm more interested in this phenomena with hedge funds treating short term cap gains as long term.
I think what GP means is, your fund has some trading profits, which if an individual did the same trades would be taxed as earned income or short term gains, but the fund actually doesn't have profits or pay taxes at all - it's a pass through entity. You, as an individual investor in the fund, pay taxes (long term or short term cap gains as appropriate) when you exit your investment in the fund.
This is a pretty reasonable way for capital gains taxes to work. The secret sauce successful hedge funds have is not access to this tax optimization, but some way to actually generate those trading profits in the first place.
This way you get to post a net loss.
Tax are due on capital gains which is basically <sale price> minus <purchase price>.
You can't claim a capital loss unless you paid the overvalued price. And then you just lost money anyways.
https://www.investopedia.com/terms/t/taxgainlossharvesting.a...
It is literally a thing. I cannot for the life of me make sense of how to make it work that doesn't strike me as off, but enough people get utility out of the moniker that it's got a page. So...
Tax loss harvesting is real, you just time when you take a loss to offset a gain. Then immediately reinvest. You haven’t lost any money in total, you can just claim the loss on your taxes (but will pay higher capital gains in the future).
You don’t pay taxes on inheritance.
Very subtle difference,though. I am simplifying things here but IIRC, Bear Stearns blew up because they wrote insurance for things they didn't think would ever happen (housing mkt going down) and had a lot of exposure vis-a-vis how much premium they collected (i.e. sold a put -- limited upside , unlimited downside). I doubt ARKK has _written_ put options. It might be the case that the value of the ETF will go down drastically but they won't go bust because of liabilities.
I was reminded of this because Bear Stearns was actually the only major player that refused to bail out LTCM [1], which pissed off a number of other firms. I don't know if the institutional memory was long enough for this to impact Bear 10 years later, but it is ironic they were looking for a bailout after being so adamant about not participating in one.
To your point, the main LTCM crew raised money to start a new fund only a couple years after their disastrous failure. People were willing to gamble millions on these guys still!
[1] according to the book "When Genius Failed"
ARK is like a gambler who won his first lucky bet on a horse in life (TESLA), got hooked on gambling (growth stocks), made some incredibly stupid bets and is now in complete denial when markets turned against him..
LTCM did some novel and sophisticated stategies (for a time), realized the markets got too shallow for its strategies, returned most money to investors and lost liquidity due to black swan event. It is too easy in hindsight to tell they should have known better.
If you want better comparison for Cathy it is Bill Ackman's Persing Square Capital Management buying Netflix in euforia without any analysis and dumping the stock in panic 4 months later, loosing 400 mllion dollars..
Also FWIW the next fund that the core group started didn't last much past 2008. I think it's fair to say they were wrong about the amount of risk they were taking.
But yeah the initial bets were smart and not "gambling". The problem is the insanely big and leveraged positions they took and continued to build even while their core business was clearly shrinking. Especially the way they dove into markets they were less knowledgeable about, at least the way the book presents it they did not do their homework on e.g. merger arbitrage in the way they had with the bond market.
IMO they totally got cocky too, even if they got cocky for a better reason.
In many markets, real estate is looking similar.
I don't remember that. I watched a few of his videos. Seems like rational statements explaining why Warren might be wrong about Bitcoin. https://www.youtube.com/watch?v=RAvYvyj37UU
> Blew up a lot of retailer investors funds through his SPACs although he himself Madeoff quite well given the closing conditions.
I was not aware of that. That's a pretty strong accusation you're making there, it sounds like he committed crimes. Do you have a link to substantiate this?
A lot of his SPACs are trading under their initial price of $10/share.
Here's 3 examples: CLOV, SPCE, SOFI. If you bought in during the SPAC stage or at IPO, you'd have lost quite a bit on any of these.
> Blew up a lot of retailer investors funds through his SPACs although he himself Madeoff quite well given the closing conditions.
does not seem to be comparable or descriptively equivalent to this part:
> CLOV, SPCE, SOFI. If you bought in during the SPAC stage or at IPO, you'd have lost quite a bit on any of these.
Was your reference to "Madeoff" intended to convey a ponzi scheme? Because that doesn't seem to be what those investments are.
Instead googling indicates these are real companies that appear to be operating, albeit in challenging businesses.
Here's what I found:
CLOV Stock: Is It A Good Long-Term Opportunity? Clover Health is a former SPAC that became a penny stock. At the $2-3 level, could CLOV be presenting a decent long-term opportunity?
Bernard Zambonin and Guest Contributor
May 23, 2022
Premarket Mover: Virgin Galactic Holdings Inc (SPCE) Up 1.65%
https://www.livemint.com/news/world/chamath-palihapitiya-kin...
I see what you did there mister :)
I see what you did there.
Is that really so different from the VC approach?
VC really makes its money work for it.
ARKK is just picking stocks.
A VC putting in $1M for a Series B and getting $100M out is within the realm of possible.
Buying $10M of public stock and having it turn into $1B isn't quite so realistic, at least not on a continued basis that an investing thesis would require.
Far be it from me to defend ARK but this statement I've seen repeated by CFAs -- velocity of money is linked to inflation -- it's the only reason we didn't see inflation in the "real" economy earlier, no?
Since financial assets were still moving freely (and sovereign bond yields were crushed), they felt the immediate effects of inflation. It's obviously idiotic to say that velocity of money will be decreasing going forward or something (did she say this? surely not?), but it seems like the recent increase in inflation is due to the real economy opening back up (and velocity returning to normal) along with lingering supply side shocks.
Would love some correction if I've got this the wrong way 'round.
It is tough being mid 40s and realizing my entire adult life was a golden age that is gone forever.
I do agree You're right that we are probably seeing the effects of globalization policy though, but I can't say I've thought much about that long of a time frame.
Mass onshoring will likely drive higher prices.
Cathie Wood thinks that more technological improvements are coming to counter-act this, and might even cause deflation. Most commentators are unconvinced.
It took a while for banks to extend themselves based on capital like they did prior to 2008. Once they did, the full extend of the "new money" drove inflation.
It can be, as increased demand can increase the velocity of money, but it's not directly or intrinsically connected (as you can also just suddenly trade something back and forth many times without prices changing and the velocity would have increased).
Really, it's demand/supply which determine prices.
(real GDP)×(price level) = (money supply)×(money velocity)
In general terms its probably a decent model. But ya, there are situations where it's not completely internally consistent.
If you were unlucky enough to hop on the bandwagon near the end of 2020 and you're still holding on now, that is really unfortunate.
You can also have 4 years of 20% returns with 10bn of capital, and then 1 year of down 50% with 50bn and have actually lost $$$'s despite a nice looking % return.
It also happened to some household names that you would consider "legendry investors" who made massive returns in 08.
Once you know that you see it again and again
Yes but luckily the fund went up much more than that, much faster. Feels like a strange point to make?
Peter Thiel gave a speech at a Bitcoin conference a few months back where he explained Bitcoin price movement resembling a levered tech stock. And I'll say, it makes a lot of sense and dispels the whole idea of Bitcoin being an inflation hedge.
Her response: “my team is more diverse than most, and diversity adds effectiveness.”
She also supported Trump.
Like she’s going for crazy in all directions.
It's important to note what this really means. You can have 4 years of 20% returns and if the last year you're down 50%, you gave back nearly everything you've ever made, assuming you had no new money come in those years, otherwise even more. The max drawdown is whats important. You can almost always make money writing out of the money call options, except the one year where you give back everything you've made and then some. As expected:
> Her ARK Innovation fund, often known by its ticker as ARKK, returned some 157 percent during that first year of the pandemic, compared to just 18 percent for the S&P 500 as a whole... Wood’s fund is now exactly where it was in March 2020, meaning pandemic investors who bet on her have now round-tripped all the way up and all the way back down. Adjusting for inflation, they have lost money.
Cathie Wood is one of those investors that just makes directional bets, in her case high growth tech stocks. They happened to do well last 5 years or so, so it appears that Cathie has done well. But same as someone who just plowed a bunch of money into Bitcoin in 2012, it doesn't mean you're a good investor or you have anything interesting to share today.
I read her Twitter occasionally and found her very unimpressive. For instance, she made some uninformed comments about "velocity of money" decreasing and that's the reason we won't have inflation (this was during the "transitory" phase of inflation denial). Then she had some ridiculous examples of things actually going down in price like AI training costs, which should balance things out. It was so comical it could have been on the show Silicon Valley.
https://mleverything.substack.com/p/cathie-wood-inflation-an...