Warren Buffett on obscene management fees

We should weigh Warren Buffett’s words carefully, given his success and wisdom.  Of course, he’s got an error rate, too, like we all do.

For investors who don’t care about the volatility of their investment returns, money managers who hedge their portfolio exposures may not be a good fit, as their returns will be muted by the insurance they buy.  Then again, if you were happier at the end of 2008 losing 20% of your hedged investment in a market meltdown instead of 50% in the S&P 500, then perhaps hedge funds might be helpful.  The S&P 500 has a Sharpe Ratio running under 0.5, while the hedge fund space ekes out something over 1.0 on average, with the best fund managers putting up much higher risk-adjusted returns over time.  If I am responsible for a pension fund or endowment, I think I am sleeping better with those higher Sharpes.

I do agree that 2-and-20 (standard 2% management fee plus 20% of performance upside) are too expensive for most investors to pay, as it isn’t clear they are getting the superior performance for these fees.  On the other hand, 5-and-44 for Renaissance’s Medallion Fund seemed to be priced too low back in the day, and investors were sad when their investments were returned when Medallion closed to them.

The Oracle Of Omaha targets his criticism carefully, and I applaud the example of charitable giving he sets.  But it is important for all of us in earshot to understand where we are similar to him in risk preferences and investment goals, and where we are very different.

Julian Robertson talks hedge funds at primetime Bloomberg Surveillance

I caught a little bit of Julian Robertson last evening, and found his comments to be similar to the ones Leon Cooperman made four weeks ago to CNBC (Robertson actually made some comments about Cooperman as well, wishing him well).

When the bubble (caused by low interest rates) bursts, people are going to get hurt. …  It’s the most difficult time I’ve ever seen in the [hedge fund] business.  There are people squeezing shorts, and they’re making a business of it.  Furthermore, I don’t really quite know how quants work, but I think they have a way of squeezing shorts …  At any rate, I think it’s tougher to be a hedge fund investor than ever before.  Hedge funds don’t normally outperform the market, except when the markets go down.

My guesses on his thoughts on quants:

  • There were a lot more quants in 2000 and beyond, than back when Robertson was running outside money in the 80s and 90s.  Probably 100x more.
  • Robertson rode a big bull market from 1980-2000
  • He was great at picking shorts and picking longs, based on studying fundamentals and management–it can be hard to do even one of those well.  Harder to succeed when the high frequency shops (subset of the quants) are front running good pickers
  • Regulations, like FD, were not in effect yet (not that Robertson was a cheater)

Quants rely on identifying and trading out inefficiencies.  So do stock pickers.  Which group relies more on the other?  Me thinks the pendulum does swing, and it swings for thee.

Robertson, like Cooperman, makes me feel less old.  From a friend who recently had dinner with him a couple years ago, I understand he’s a classic southern gentleman.


ADDENDUM:  Just saw this brief explainer on quant strategies over at Marginal Revolution.

Thoughts on CNBC’s Delivering Alpha quotables

Wall Street celebrity conferences such as CNBC’s Delivering Alpha are always fun.  While I find them to be roughly 60% entertainment and 30% “talking your book”, there are also some nuggets of inspiration, friction with some of my priors, and even worthwhile tweaks to my portfolio (especially hedges) on occasion.

Ray Dalio of Bridgwater Associates, with $150 billion in AUM between its Pure Alpha and All Weather strategies, shared his view of central banking policy and growth outlook.  He disagreed with Jamie Dimon, who said he would like to see interest rates rise the day before the conference.  This makes sense:  JPMorgan’s banking revenue is traditionally dependent on interest rates greater than zero, while Bridgewater leverages Treasuries in its risk-parity approach, and would stand to lose if rates increased.

Paul Singer of Elliott Management indirectly agreed with Dimon, in highlighting the high risk of enlarged central bank balance sheets, which he has been doing for many years.  By unwinding balance sheet, central banks would take money out of the economy, thereby increasing interest rates.  He asserts that market ‘practitioners’ had a deeper understanding of risks than academics and policymakers, and the arrogance of the latter, who did nothing to mitigate risks before the Great Recession.  (Though Tim Geithner was also at the conference, the organizers did not have them share the stage).

Carl Icahn also agreed, calling this interest rate environment a bubble.

Interest rates are part of merger arbitrage, my strategy.  Simply stated, if there isn’t a soft landing, there will be a hard one.  Hopefully, I am able to find a good way, either way.  So far, so good.

Eric Falkenstein’s Finding Alpha

In my old days of proprietary trading (mid-2000s), I was a voracious reader (when I wasn’t trading index or managing risk).  I’d read a couple of hundred blog posts, journal articles and the occasional research paper weekly.  One of my favorite bloggers–in those early days of blogging–was Eric Falkenstein, whom I likened to Thomas Kuhn, for finance.  Reading the first chapter from his Finding Alpha certainly only adds to my respect for Eric.

Just a couple of excerpts to wet your whistle:

The more educated you are, the easier it is to confabulate an explanation for seemingly anomalous results.  A step-by-step outline of the little evasions and selective omissions used in self-delusional good faith by smart, educated academics is useful in understanding how flawed paradigms survive.  Outsiders cannot judge these theories because of the jargon and specialized mathematics of this literature, other than to look at the general results.


There are situations where alpha exists like the archetypal arbitrage, but the emphasis should not be on the risk adjustment and portfolio mathematics, but rather the parochial details about a market niche that may allow one to confidently know that alpha is really there.  No matter what your position, it helps to understand how the archetypal alpha is created, because a manager who knows the source of his organization’s alpha is much more effective than one who merely knows everyone’s name … Learning by doing often leads one to drastically refocus one’s tactics or objective, as one learns of more pressing, or more feasible solutions, as those who went to California to find gold, but then made their fortune selling shovels.  Entrepreneurs,  inventors, alpha seekers and others like them are trying to create value by doing something differently from how others would do it.

I just finished reading Laura Ingalls Wilder’s Farmer Boy with my youngest child, after first reading it when I was his age, and it really struck me that, no matter how our economy and cultural context has shifted, true alpha to me remains the same as how Almanzo’s father, James Wilder described it:

A farmer depends on himself, and the land and the weather.  If you’re a farmer, you raise what you eat, you raise what you wear, and you keep warm with wood out of your own timber.  You work hard, but you work as you please, and no man can tell you to go or come.  You’ll be free and independent, son, on a farm.*

I’d like to tell my kids:  If you are managing your own money, you depend on you yourself, your assets, your service providers, and what the market gives you.  You raise what you eat, you raise what you wear, and you keep warm with the alpha you’ve found and mined.

They might need to change assumptions regarding resources and institutions, but not the healthy tension between just how much is out of our control, and yet how much we would find if we seek.

Falkenstein’s Chapter 1 of Finding Alpha can be found here.  Let’s start a Nobel prize fan club for him.

* Of course, I think Wilder first assumes Lin-Manuel Miranda’s Hamilton lyric, written for George Washington:

If I say goodbye, the nation learns to move on
It outlives me when I’m gone
Like the scripture says:
“Everyone shall sit under their own vine and fig tree
And no one shall make them afraid.”
They’ll be safe in the nation we’ve made
I wanna sit under my own vine and fig tree
A moment alone in the shade
At home in this nation we’ve made