Dear Hedge Funds: Index Funds Didn’t Eat Your Returns

Who would be such an idiot to claim they're "safe" in the first place? Any investing is never "safe": you can always risk losing part of your money, even if you invest in a house. Not investing your money isn't safe either.

Indexes can certainly dip for years: that's why you manage your risk and only invest money you don't need that much so that you don't have to cash in your investment during bad times. As long as the economy grows the growth will eventually be reflected in the indexes. Even a single 10-year period with a common stock index lower in the end rather than in the beginning would be, in practice, a rare occasion. Most depressions are over in a few years. Some continents can tank longer but you will want to buy indexes from different areas of the world anyway. Or you can only buy your local indexes, making sure you will yourself go up and down with the indexes you buy.

An index will grow a few percent annually in the average, compounded. This is over decades which imply bad years and very good years. To buy the most passive index funds that have the smallest operating costs and letting your money sit in there is more and more likely to beat active funds and individual stock picking simply by waiting for the years to go by. Any costs saved by skipping active management fees or stock transaction fees will accumulate into your earnings instead.

To me stock picking on the basis that you know better than the market is largely hubris. Most of the people I know who do it don't do any meaningful benchmarking so it's impossible to properly assess success. When the market goes up they made money (yaaay - I picked well) but when they lost money it's because the market went down (nothing I can do in the face of that).

There are a decent number of people manually investing their pension and I genuinely think some proper requirements on reporting would be valuable for them.

Walking in the footsteps of giants, the first modern individual, for me, being Ricardo. https://en.wikipedia.org/wiki/David_Ricardo

You mention 'buying global' Bear in mind that most stock markets outside Anglo Saxon countries are very different, as company financing goes very differently. 'Buying Germany' is completely different from 'Buying DAX'.

If you're seeking an index, there should be passive funds for most major MSCI indexes down to the obscure, but they're representative of stocks, not of economies and fundamentals.

If you're interested in building portfolios, then proxies are the best bet, and that's why funds-of-hedge-funds exist. They cover a lot of exotic interests by packaging together hedge funds into certain groups. I have always avoided these, however, as often hedge funds avoid being part of funds-of-funds.

In a world where everybody is invested in the index, and no-one is buying individual stocks, there is no market to make.

That is one way to read the letter. Another way to see it is that technical innovation has provided much cheaper ways to capture the value the hedge fund previously provided. Between index funds that are a cheap way to capture macro gains and and algo funds as a cheap way to capture micro gains there just isn't a reason to pay a hedge fund manager his 2 & 20. I for one am glad about this, because that hedge fund managers profit came largely out of my (or some aggregate person much like me) pocket.

> HFT is providing liquidity, there really isn't a situation where a 'real' investor needs liquidity at the microsecond level

This is a common misstatement of the liquidity argument for HFT market makers. The correct way to frame it is that HFT market makers can provide liquidity cheaper for a variety of factors:

1) cheaper infrastructure as it is much cheaper to get a machine at an exchange than a person in a pit.

2) more efficient quoting as a computer can quote thousands of markets while a person can quote a half dozen.

3) less risk which is the crux of the argument for speed. To a market maker (HFT or otherwise) the risk they are trying mitigate is the risk presented by hedge funds and other large block orderers. Those large blocks will move the price of the market (that is in fact how the large block orderer captures profit, the information imbalance they have at the beginning of the order compared to the end). Historically some of that profit came out of the market makers pocket, so they had to price every trade higher to account for it. It has always been a cat and mouse game between market makers and hedge funds. Now HFT is better at recognizing and reacting to these large block orders meaning the market maker can price less risk into all of their quotes.

> an average investor might not make much money in the market if they started putting money in now.

One of the very nice things about our markets is that they will actually reward you handsomely if you take that opinion and turn it into action.

The fraud is not so much my concern- it's the unethical business plan. Valeant is just a watered down Turing Pharma. All the while Ackman continued to grow his position.