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Comment by carlob | Hacker News Reader

> But someone who earns more will also have a higher marginal tax rate.

Not currently on capital

> But someone with $10M will be able to get the same risk adjusted return as someone who has a net worth of $100k.

That's exactly what Piketty has shown to be false. If you look at stuff like endowments and sovereign funds you'll see gains that are nowhere near what's possible even for funds that have $100M in capital.

There are economies of scale involved here, both in diversification and in management. Moreover some markets are not even available to investors who are not larger than a certain threshold.

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> Not currently on capital

I said in my comment that return on capital should be taxed the same as labor income.

> That's exactly what Piketty has shown to be false. If you look at stuff like endowments and sovereign funds you'll see gains that are nowhere near what's possible even for funds that have $100M in capital.

Do they really outperform a basic index fund strategy? Any data on this?

There isn't a market that offers better risk adjusted returns than than what is available with affordable index funds.

The only exception are probably the index funds of Dimensional Fund Advisors. They are only available to investors that have an approved financial advisor.

> Do they really outperform a basic index fund strategy? Any data on this?

Yeah, Piketty's book. But of course the Norwegian government and Harvard administrators are just a bunch of idiots, they have billions of dollars to invest and didn't think of a basic index fund! Now they can save a lot of money firing whoever was managing it for them!

Most fund managers are very intelligent people, yet most of them fail to outperform a basic index fund.

The Harvard endowement underperformed the sp500 by more than 3% annually for the last 10 years. So instead of a plus of 220% it produced a plus of about 130% over the same period.

There is lots of data that shows that passive strategies outperform hedge fund and these university funds.

It might be sound strategy for an endowment to give up upside in the most raging of bull markets that we’ve ever seen in exchange for lower drawdown in down markets. A low beta portfolio underperformed (by definition) in 2009-2019.

I’m a staunch proponent of passive index investing so I suspect we largely agree on philosophy, but the mere fact that someone underperformed in the somewhat historically anomalous market we’ve enjoyed for the last decade is not conclusive that they clowned it, IMO. If they outperformed 2005-2008 or outperform in the next bear market, that would be evidence again full clown performance.

https://globalbetaadvisors.com/the-yale-myth-analyzing-the-p...

Endowements have mostly a negative alpha when using a 4 factor model.

That article states they outperformed when measured over a 10, 15, 20, and 25 year period and underperformed over a 5 year period. (See the table. The longer periods include the more recent periods meaning they had strong outperformance early that more than made up for the recent under.)

Is that evidence that they’re dramatically underperforming? It seems the story is mixed and you could argue either way depending on whether you think the last 5 years are more important than the prior 20 or not. (It might be, if you argue that something fundamental changed. That would fall into the “this time it’s different” which is generally falsified eventually.)

The endowements averaged the market over the last 25 years. There will always be some funds that will outperform the market. In the majority of the cases this will be luck. (Except for exposure to known risk factors like size or value)

Harvard is optimizing for a different objective than retail investors or even smaller endowments. It can afford to take less risk and get less return.

Lots of small colleges with 100MM endowments using a passive strategy will fail to survive the next deep recession. They need those returns to survive, so they have no choice but to accept the associated risk. But one deep down market without an associated counter cyclical uptick in enrollment numbers and they are dead. Ask any small private college CFO and they'll agree.

On the other hand, the public markets could lose all their value and Harvard would still be able to cover its operating expenses.

Harvard's goal is to survive for centuries. The goal of a college with a 100MM endowment is to make payroll during the next few school years.

There return is worse than a passive portfolio with the se risk exposure.

https://globalbetaadvisors.com/the-yale-myth-analyzing-the-p...

With this in mind, Harvard's recent missteps diversifying internationally (land, agriculture, etc) becomes a lot more interesting.

It'd be interesting to see how much those missteps brought down the overall ror.

Long term capital gains taxes in the US currently have a progressive (bracketed) structure.

They start at 0%, go to 15%, then 20%, then 23.8%.

Short term capital gains are taxed at ordinary income rates, which also has a progressive rate structure as GP claimed.

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