Did you ever stop to think the reason I “choose to ignore” your illustration is because I dont have an issue with it? Where have I said that quant management doesnt work? Where did I say that there is only one correct style of management? I am not the one making sweeping generalisations about fund management styles.

You say Red Dog is right, and that I am wrong in asserting that short term fluctuations oughtn’t be driving long term investment decisions. But you have demonstrated that you completely misunderstand what I was saying.

In fact you go on to tell me that what I call “short terms deviations … are bear markets lasting years and wiping out ALL the benefits accumulated in bull market times…”

Wow, I didn’t realise that by short term I meant MULTI YEAR BEAR MARKETS. Gosh. Thanks for clearing that up for me.

In fact I will sign off now because you are able to provide all my arguments, including the ones I never gave a hint of making.

Look back over what I have said. I gave a simple explanation for asset backed securities, made the case for absolute return funds, and complained that RD was being too short term in his thinking, and was in a fund that obviously didnt suit him.

I dont know who it is you are arguing here, but it aint me. Now you have just pissed me off.

“No one has EVER mentioned to you the frequency of change, and the frequency of changing a manager every quarter is a rethoric expedient you use”

It was simply to emphasise my point that short term fluctuations dont mean that much, and making decisions based on them would have you jumping ship every quarter. But even changing managers each year is probably too much. You said it yourself, it takes 5 years to see if a manager has added value through skill.

“the numerical evidence is conducted on groups of funds styles and methodologies therefore taking in the good and the bad…”

So you are controlling for survivorship bias, backfill bias, and the smoothing of returns that many hedge funds do thereby reducing their apparant volatility. Otherwise, big surprise, an index which probably has upward biased returns and downward biased volatility manages to look appealing on a risk-return basis.

“discretional ones that still think that meeting the management is an important component of picking a stock”

These managers are obvioulsy buying COMPANIES not stocks. Dont you think it takes a leap of faith to assume that everything that needs to be known about a company is contained within a single piece of data: the price.

“The S&P 500 index is just too short.”

82 years is too short. There must be some really important stuff that went on in 1914-1926, that has so much relevance to investment markets in the future.

Oh and the return I have is 10.2% from Jan 1926. Which, last time I checked, and bear in mind this is without the benefit of a magical numerical telescope, is more than 10%.

I can give you the methodology used by the University Endowments Funds, or the serious Funds of Hedge Funds, that before selecting a manager, rely on a giant heap of quantitative analysis on the performances of a single manager.
First of all, to be able to discern talent by luck, you need 5 years of track record. After 60 months, you can, with appropriate, complex, but valid analysis, tell a manager produces alfa due to a talent, and not massaging numbers and/or buying and holding CDOs (Is not casual the CDOs blew before the 5 year time limit, is a well known threshold..).

Secondly, the manager has a benchmark he himself incorporates in the Fund’s Offering Memorandum. therefore he is confident he will beat the chosen benchmark.
He can fail it for one year…no problem, you don’t change the manager for a bad year…provided the bad year is just underperforming the benchmark, because if the bad year has been a draw down out of proportions and destroyed one third of the capital…your argument of not changing it immediately has no substance whatsoever.

But in case of a single bad year, no problem. But you start monitoring his numbers very closely..and after further six months check again…if a second bad year comes to grief…take the money out and go back to the drawing board. This works very well in practice, and is SOP (Standard Operating Procedure) for many ultra billion Endowments, and Pension Funds. If you have better approaches, I’m sure Harvard and Yale Endowments will be happy to listen to you and incorporate them in their SOPs.

Oh, pls, do not forget an honest manager will NOT cash performance fees in case of NOT beating the benchmark, and will have a highwatermarck clause not to have the client have to pay fees only to return his money at the level it was before a draw down.

Remain wary of the perfect systems…mine is not perfect, involves continuous work to keep the hedge, and involves carefully monitoring heaps of numbers to keep the competitive advantage…but it works.

About delivering better returns…I have the numerical evidence Hedge Funds enhance the efficient frontier on traditional investments, and have been doing it for 15 years now…of course you also need a lot of number crunching to select the right ones…but having a rigorous methodology and a discipline helps, and the numerical evidence is conducted on groups of funds styles and methodologies therefore taking in the good and the bad…and the averages still largely advance the traditional efficient frontier.
If you pick the best ones the result is just amplified…furthermore.

“I repeat again, the 94 years average return of the shares, in US$ is about 6.4%…”

Where are you getting this from?

A study on risk and returns published in Europe by ABN AMRO that carries statistics much longer than the existing S&P 500 index…when you need to know what the real long term delivers, you go as long as possible. The S&P 500 index is just too short. I’ll publish here in a couple of days the web reference of the study, might be an interesting reading for many.

“The S&P500 has returned around 10% since inception.” Around is below 10 %, has produced a 9.5% return with a volatility around 13.4%.
I can demonstrate track records that have produced average returns of 10% with a volatility around 6%….That means that conveniently using a modest and controlled amount of leverage, you can beat by far the performances of that index, bringing your returns around 16% averages with volatilities that reach barely the 9% just leveraging a modest 50 cents per dollar, returns NET of commissions to the Clients, and including a generous (for the lender) 1% spread on the US LIBOR as cost of the leverage…for the past 7 years regardless of the level of that LIBOR.

And producing positive returns in the bear market years of 2000, 2001 and 2002.

“The score isnt much better for active managers.”
Agreed…but for your type of active managers, the discretional ones that still think that meeting the management is an important component of picking a stock…my type of active managers are driven by rigorously numerical disciplined approaches, in the portfolio selection (like the one I have illustrated and you choose to ignore…Oh…sorry, I should have known that looking in a telescope, being an empirical instrument that endangers your conception of a Tolemaic universe governed by Aristotelic theories; showing you the truth..is not contemplated!)
and in the trend analysis to keep that portfolio from being destroyed by ludicrous draw downs that wipe out excessive amounts of capital…oh, those managers DO beat the benchmark constantly.

They live and die cashing the performance fee….not mismanaging large assets for fees unbound by the real results.

I was not offering any method to calculating their specific risk, I never said they were safe, I never said the rating was correct, I was just explaining the concept. So I dont know what you are going on about.

What all the people behind the elementar maths you espoused did miss, was that the probability of the extreme events that flawed from the beginning your risk control was much much higher than what appeared in the elementar and insufficient basic maths you, some managers and the mighty rating agencies used.
EVT, Extreme Valuation Theory, is used by quants when you want to realistically calculate the risk, and therefore do not limit yourself to model a curve of probabilities and then guess the tails with gross, very gross estimates, like the childish math that was used to deem the subprime mortgage backed securities as safe and rate them AAA.
When you really want to know what kind of probability and effects an extreme event will have, you model directly the tail and analyze it.

That kind of analysis, would have allowed you to totally skip the asset backed securities you, and others like you with relatively limited tools had deemed safe and low volatility securities.

You have no defence whatsoever on that, as reality proved that your basic description and the perfunctory risk analysis performed by you, in the good company of the rating agencies, led to the disaster that is under everyones eyes.
You just sold a naked option, and when the extreme event came…it blew the whole house apart. As it happens when selling far out of the money naked options to cash the premium….till the option comes to strike, and you cannot deliver the underlying.

That was the substance of the asset backed securities played by many blue blooded managers…that now hide and hush as much as they can.

Look, if you are investing for retirement or another long-term goal then it means nothing if you lose money with a particular manager in the short term. Nothing. It doesnt mean that manager is bad, and it certainly doesnt mean that another manager that made money in the same period is better and will protect you from downturns in the future.

If you are going to abandon ship every time a manager doesnt beat benchmark for the quarter you will end up needlessly turning over your portfolio at a stupid rate.

I am always going to be naturally wary of people that claim to have a perfect investing system, expecially if they claim that the system should be obvious to anyone truly wanting to be proper fiduciaries. Usually, if someone has a system that will generate higher returns with lower risk, it will be copied, exploited and the advantage/signal will disappear.

“I repeat again, the 94 years average return of the shares, in US$ is about 6.4%…”

Where are you getting this from? The S&P500 has returned around 10% since inception.

“if the Fund manager is only required to pick a portfolio, buy and hold it, in the 90% of the cases it will do worse than the index”

The score isnt much better for active managers.

but those techniques imply quantitative knowledge, and the willingness to use this knowledge.
I can also show you track records of a New Zealand product launched in September 2007 that returned exceptionally well in the so called volatile market.Distributed to punters that just happily received their quartely coupons and saw their money also grow in capital appreciation.

Again, the endowments of the major American Universities are regularly using allocations of more than 50% of their large funds to total return funds, and the fairy tale that you should be careful in allocating money to these funds is linked only to horror stories, like the ones of credit based funds, that could be EASILY avoided spotting the nature of the undelying instrument, thanks again Kimble for explaining me again the nature of those mortgage based funds, but the maths you are referring were flawed from the beginning, and if you know EVT Extreme Valuation Theory, it would have showed you the flaws exactly from day 1…skipping, at least for your investors, the pain.
I did it for mine….

Reality showed you that the elegant theory you rexplained me was a bunch of BS.

Red is right, there is nothing better than to separate wheat from chaff than a good strong bear market, and I don t see why the fairy tale that you should buy , hold and go down with the ship, and moreover ignore the damage, should be propagated again as the correc orthodoxy.

I can prove to anyone, with solid numbers, that there is another way to manage that can be used to stick to the primary fiduciary duty.
Do NOT loose the money you have been entrusted with….they are not just money, they are Joe Public future and dreams.

And Red Dog is right. Why Are you empowered to stick a label of correctness or not?
Why there should be an orthodoxy ?

And who should administer it?
Again, if the Fund manager is only required to pick a portfolio, buy and hold it, in the 90% of the cases it will do worse than the index, and just remember that you cannot know if your fund manager is a Warren Buffet BEFORE it becomes a Warren Buffet…and AFTER, the good part of the extra returns have been made.

What you call short terms deviations, I repeat, are bear markets lasting years and wiping out ALL the benefits accumulated in bull market times…and more rendering your so called long term so long that it outlasts the investor natural life.

I repeat again, the 94 years average return of the shares, in US$ is about 6.4%….and bonds are just slightly above 4%, but if you can avoid just one of the bear markets of the cycle, that usually happen every 6 or 7 years, then your average returns shoot well above 13%.
Making a serious difference.

I can prove you, bear markets CAN be spotted timely avoided with relatively simple trend following techniques, but those tec

However the point I wanted to make is the absolute return funds who use borrowing to provide additional exposure. These funds are subject to movements in the Libor rate as well as the margin charged by the credit provider. Interest charged by the credit providers are not fixed and therefore have the potential to adversely affect returns should the abolute return funds performance not increase commensurately.