The fund manager who got the most out of the credit default swaps in the long run had to pull large trick in his fund to prevent his investors from firing him just months before the crash proved he was right. Inf act there was a delay between when the losers realized there was a problem and quit throwing good money after bad and when the investments actually went bad. Even if you invested on the very last date you could, you would have lost money for a short time (I'm not sure how long, probably just a couple weeks) as the losers used every trick they could come up with to prevent the crash.
That kind of strategy could lose money related to index if five year prediction and business cycles cancel each other (think counterphase signal).
It would be very interesting to see simulation of perfect foresight rebalancing strategy in different timefrimes.
In broad brush strokes, yes. However this blog post uses a different math scenario.
- Warren Buffett's premise for winning the bet was the hedge funds' 2% "management fee" and 20% carry. Therefore, any attempt to beat Warren's passive investing starts with a handicap of minus-2% and has to have bigger positive returns that overcome it.
- This essay is about long-term "God clairvoyance" of _eventually_ being correct is negated by short-term negative returns which make people "fire" God. E.g. the investor might have a 2-year lockup of his funds before he can redeem them. E.g. After 2 years, the investor sees that the hedge fund is losing money -- but doesn't realize that it's a temporary dip. Therefore, he redeems his money (aka "fires God") and never got see that God was ultimately correct.
(Or put another way, if the lockup period and the fund's entire lifetime were exactly the same, the blog post couldn't be written.)
Funds might be locked up for two years, and afterwards only redeemable on the first day of the fiscal quarter. On the first liquidation event, only 25% of the funds are redeemable. If you submit notice on the first day of the next fiscal quarter, 33% is redeemable, followed by 50% and 100%. If you miss a quarter, the sequence starts over.
That one is not even terribly complex.
It essentially argues (unconvincingly IMHO) that it is difficult to _distinguish_ a (very contrived type of) "perfect" active investor from a "bad" investor whereas Buffet argues that it is difficult to _be_ a good active investor.
These are not necessarily inconsistent but they do have opposite impacts on investment decisions.
To my mind this is dishonest marketing "research" whereas Buffet is making an important point.
I do think this article is a bit sneaky dressing itself up as entertainment since it is published by a business that profits from people deciding to invest.
It does provide a means to illustrate the agency problem though.
If I had perfect knowledge of the future and had to buy and hold a given set of positions for myself for some fixed period, I would simply choose those that maximised my return at the end. HOWEVER if instead I had to invest on behalf of others (in return for some fee) and was subject to being fired, I would be tempted to choose a different (thus suboptimal) set of positions such as those with smallest drawdown / maximised minimum rolling quarterly Sharpe / ...
The argument that the fund research sellers peddle is that "we recommend based on the investment methodology in use, the processes, risk management, the people, etc etc". Otherwise what would they be doing that a simple google search couldn't?
Again, arguably far better metrics to find an active fund that will on average out-perform. They're not wrong.
While I would not go so far as to call it "silly". I think an interesting point is obscured for the purpose of a dramatic headline.