The Best Hedge Fund You’ve Never Heard of
The graphic below highlights the performance of the biggest names in the hedge fund business. Their historical survivor-bias-filled track record is amazing.
Just how amazing is the performance?
Not really that amazing.
Below I highlight the performance of a portfolio that takes $1 and invests it in 10-year bonds. The portfolio then borrows $1.50 and allocates 25cents to the S&P 500 and $1.25 in the 10-year. I assume the cost of borrow is the t-bill rate+30bps (funding spread). Effectively, you have a 2.25x 10-year position and 25% S&P 500 allocation, or a gross 2.50x lever. The performance over the past ~16.03 years (4/1/1997 to 7/31/2013) is presented below (trying to mirror the period for the stats above):
- 15%+ CAGR
- 16.84% MaxDD
- ~0 correlation with common equity benchmarks
- Fully transparent; no lockups; no fraud risk; no K1s; no due diligence; no skill
Who’s ready to allocate $10B? …I’ll charge 25bps…Bueller?
And here are the annuals:
Incredible, isn’t it? Of course, one would be insane to think that the performance of this levered 10-year with S&P 500 portfolio will perform similarly in the future.
But would one be insane to think that the performance of the “genius” hedge funds of the past 16 years has been driven by direct or indirect exposures (short book interest) to leverage and long-term bonds?
The results above highlight that a barney-style strategy that simply levers on long bonds and allocates a bit to domestic equity risk can generate a healthy return. Pile in a few more asset classes and add some additional leverage and–MAGIC–you have a performance record after fees that is essentially the same as the “best in the industry.”
Data-mining you say? Of course. But looking back over the past 16 years and clustering the top performing managers–after the fact–is data-mining as well.
Remarkably, these same “genius” hedge fund managers have overwhelmingly had lackluster performance over the past few years–just like the long-term bond.
I’m not saying, but I’m just saying…
Where are the returns of the future going be?
Note: This site provides NO information on our value investing ETFs or our momentum investing ETFs. Please refer to this site.
Join thousands of other readers and subscribe to our blog.
Please remember that past performance is not an indicator of future results. Please read our full disclosures. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Alpha Architect, its affiliates or its employees. This material has been provided to you solely for information and educational purposes and does not constitute an offer or solicitation of an offer or any advice or recommendation to purchase any securities or other financial instruments and may not be construed as such. The factual information set forth herein has been obtained or derived from sources believed by the author and Alpha Architect to be reliable but it is not necessarily all-inclusive and is not guaranteed as to its accuracy and is not to be regarded as a representation or warranty, express or implied, as to the information’s accuracy or completeness, nor should the attached information serve as the basis of any investment decision. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission from Alpha Architect.
Definitions of common statistics used in our analysis are available here (towards the bottom)