Oct 01, 2012
Snapshot of some basic allocation returns for the Year To Date period ending Sep 30, 2012.
Hedge funds are having a truly dismal year. It is actually shocking to see the spread this wide. For what its worth, the S&P 500 is +16.4% through Sep 30, 2012 --- it is not shown relative to these others because we do not consider the S&P 500 a relevant benchmark for an overall allocation. It would be appropriate if we were to isolate the performance of just the stock holdings of a given allocation.
Note how the first 3 allocations shown below are all clustered near +11% for 2012.
And we include the below chart to show the paths taken for both the Yale and Ivy Portfolios:
Follow us on
Aug 07, 2012
Bloomberg Hedge Fund Index through July 31, 2012. While there may be room until most managers get back above their high-water marks -- eventually you run into the same core problem -- 2+20% of profits will be taken away from investors and go to the fund managers. Upside is therefore quite limited. Downside is limited as well but so is the case with a good, risk-managed allocation.
Follow us on
Jul 03, 2012
We updated this chart for YTD 2012 Performance:
2 Other Generic 'Endowment-Style' Allocations For Reference (note: including the above stock-bond chart, all of these YTD returns are clustered in the +5 to +7% range)
Follow us on
Apr 02, 2012
In professional settings, seven years is considered enough time to constitute a relevant performance comparison because it usually encompasses different kinds of markets.
Recently there has been press about how hedge funds did not beat Treasury Bills during the last cycle. We will not be so kind. A 60-40 stock-bond index is a reasonable comparison benchmark. Yes, it is U.S. based but it is a very plain-vanilla option and it is not considered an especially difficult benchmark to beat over the longer-term so this is not exactly an unfair comparison.
Next Blog: Q1 2012 Index Ranks vs History Chart
Follow us on
Jan 08, 2012
The issue of which index to use as a performance benchmark is rarely all that clear. One thing that is clear -- hedge funds had a terrible year in 2011. The Bloomberg hedge fund index was -4.9% in 2011. The HFRX Global Hedge Fund index was -8.9% in 2011. The HFRX long-short equity index was down a staggering -19.1%. Meanwhile, a standard 60-40 stock-bond balanced return using index funds was +4.1% for the year. Below is the breakdown by quarter:
Follow us on
Dec 18, 2010
Two interesting news items this week:
U.S. ETF assets broke through $1 Trillion in assets for the first time this past week. Global Head of ETF Research and Implementation Strategy at BlackRock Deborah Fuhr said in a press release:
“Increasingly both retail and institutional investors are building global, multi-asset portfolios that are designed to capture the performance of key ‘benchmarks’ for attractive market sectors -- an application for which ETFs and ETPs are particularly well suited,” Ms. Fuhr said.
Dovetailing nicely with Ms. Fuhrs quote above --- there was a report late in the week that highlighted the extensive use of ETF's by former Fidelity Magellan portfolio manager and long-time hedge-fund manager Jeff Vinik.
As an institutional investor, Vinik must disclose holdings and his September 30, 2010 13-F from his SEC filing is summarized below:
Looking over Viniks holdings, the exposures are specific: U.S. sector tilts, U.S. Small Cap, and Emerging Markets exposure. Note that SPY is the only of Viniks ETF holdings that is a diversified U.S. large cap index. 10 of the 11 other ETFs represent targeted exposures.
In the grand scheme of things, $1 trillion in assets is still a drop in the bucket --- ETF/ETN assets are poised to head dramatically higher over the next 3-5 years.
Follow us on Twitter:
Apr 12, 2010
Hedge Funds | Volatility
In the world of hedge funds, it is standard practice to list a ‘volatility target’ within a presentation to potential investors. You never see this listed in any mutual fund or investment advisor type of presentation. Nevertheless, whether it’s in the presentation or not, it’s a topic that is important to post about as often as possible.
First, volatility is a good way to think about ‘drawdown potential.’ High volatility means that the high to low intermediate moves are likely to be large – and since you can never be quite sure what the future will bring, you should generally avoid the highest volatility ETFs unless you feel especially confident in a high return expectation. The relationship between your general return expectation and the underlying volatility of the ETF is an important one.
What hedge funds state in their presentations is a ‘volatility range’ to expect – that is, what the hedge fund manager believes their strategy equates to in a bottom-line percentage, always stated as an annual figure. Many presentations then try to target a ratio of returns relative to that volatility figure. Two such examples are listed here:
Target: <15% Volatility with >15% Return
Target: 8-12% Volatility with 1.5x+ Return
Both of the above examples from actual hedge-fund marketing books are stated within the same structure: namely, the Sharpe Ratio. Return and volatility of return are both used as quantitative targets.
How does this apply to ETF’s? Each ETF has its own same characteristics. Viewing total return and annualized volatility for each ETF is a nice breakdown of the major components of the Sharpe Ratio. Moreover, you can COMBINE ETF's into portfolios that suit your own risk tolerance.
One major issue for all investors is that volatility is not static. Large changes in market volatility complicate the discussion of absolute targets of volatility. But what we can observe from actual experience is that RELATIVE volatility across different types of ETFs have been quite consistent. Below is an example of a few different types of ETFs. You can see that while the LEVEL has swung around significantly, if we were to rank each of these ETF’s – you would see that each ETF has maintained its exact ranking for every period for the last few years. Emerging markets have maintained high relative volatility vs the S&P 500, which has been more volatile than the defensive Consumer Staples Sector SPDR which in turn has been more volatile than the aggregate bond market.
What this says is that the risk of drawdown among these different ETF’s is skewed. We cannot precisely say what kind of risk there is --- but we can think that if we entered a long position in bonds and mis-timed the entry, the punishment for being wrong would not be as great as if we did the same thing in Emerging Markets.
It is professional to think in terms of volatility and risk-adjusted returns. But you do not need to be a ‘long-short’ hedge fund manager to maintain an efficient (risk-adjusted) portfolio. Overall portfolio volatility can be diluted through exposure to shorter-term fixed income. Indeed, rotating between high returning ETF segments (high relative strength) and low-volatility investments is a strategy that generally leads to the same place hedge funds are ultimately targeting: a high Sharpe Ratio.
Note: The Sharpe Ratio measures reward per unit of risk. It is calculated as the annualized average daily excess return divided by the standard deviation of daily excess return.