In other words, even though this is definitely painful, even inclusive of this event, it's one of the best performing hedge funds of the past decade.
[1]https://www.wsj.com/articles/citadel-point72-to-invest-2-75-... [2]https://www.bloomberg.com/news/articles/2019-07-19/cohen-cub... [3]https://www.baltimoresun.com/business/ct-biz-reddit-wall-str...
(Edit: It's been reported elsewhere that these numbers are net of fees. However, it's entirely possible that for taxable accounts, tax considerations still narrow the performance gap. And of course, the QQQ offers instant liquidity and did not drop 53% this month.)
Either way, the money currently in there is very likely to underperform the indexes over the next 5 years (because they need to return 100% to get back to the pre-GME position).
This may sound counterintuitive, but it's the basis of modern portfolio theory. The price that an investor should be willing to pay for an investment has to do with its beta to the broader market.
Think of it this way, imagine you could access the S&P 500 in a parallel universe. It has the same return characteristics as the normal S&P 500, but in any given year moves independently. How much does this improve your portfolio? Intuitively you'd think it's not worth anything. It's only as good as your current investments, so what's the point.
But in fact modern portfolio theory tells us that it's a huge improvement. Investing 50/50 in S&P and Bizarro-S&P, substantially improves the amount of return you can access for the same risk. That's because the two diversify each other, and the blend either reduces risk by 30% or lets you leverage up and increase expected returns by 30%.
You're saying, "maybe Melvin isn't a good investment, because it seems about equal to the S&P". But the point is an investment that's about equal to the S&P, yet uncorrelated to the S&P is massively valuable. Even if it has big drawdowns, you typically don't care as long as those drawdowns tend to occur during times when the rest of your portfolio is doing fine.
This is the same reason that a 60/40 stock-bond portfolio has massively outperformed 100% stocks historically. Even though bonds themselves return less than stocks.
What appears to be the case is they were edging the QQQ until they incinerated half their capital in a week on a bad bet and poor risk controls. So we now know they are uncorrelated with the S&P, but unfortunately we only know they are uncorrelated to the downside. (We don't know if their outperformance has been a result of real alpha or a strong market plus leverage.)
We saw a lot of these funds in the strong bull market of the 90s and the takeaway I remember was that it's impossible to know ahead of time who's going to blow up and lose all/most of your money.
I can see how this would lower the volatility of your portfolio. But how do you improve the return in this scenario?
> This is the same reason that a 60/40 stock-bond portfolio has massively outperformed 100% stocks historically
How is this possible? If I invest 100% in stocks, my return after 10 years is higher than 60/40 stock-bond. So why do you say the latter outperforms it?
Leverage. You can translate reduced risk into greater returns by getting loans to invest more.
(You don't need to try and time the market for this to work. You can have a threshold so that you rebalance when you deviate from your target allocation more than X%)
Or in other words, show me the numbers.
Mixing bonds gives you a slightly higher safe withdrawal rate but you do lose 2 percentage points average yearly returns.
According to https://www.justetf.com/en/etf-strategy-builder.html (click on "show simulation" and it will show the historical analysis) a 80/20 allocation slightly outperforms total stock over the last 20 years, while having lower volatility at the same time. I did not run the numbers myself.
Considering only the last 10 years seems pretty limited, as you are ignoring both the dot-com bust and the 2008 crisis.
T-Bills are virtually risk free, which is not the case of hedge funds, so why would you compare one with the other?
> But the point is an investment that's about equal to the S&P, yet uncorrelated to the S&P
How can you say that a hedge fund's return and the S&P are uncorrelated? They may not be identical but they are very strongly correlated.
T-bills are the performance benchmark for hedge funds but not the risk benchmark (which is generally something riskier). This can sound counterintuitive as T-bills are a very low hurdle to clear. However, in a downturn scenario generally causes rates to fall, increasing t-bill return when the rest of the market goes down. In that case its a very difficult hurdle to clear.
That is, if I started with $1 and made $1,000, a 50% loss would still be $500
- Unless you were late to the party. If you didn't get in the fund until (say) November, you have lost money.
The S&P had a 54% drawdown in 2008.
Starting from 100, if you swing 50% up 50% down you get: 150, 75, 112.5, 56.25, 84.375, 42.18, 63.28, 31.64....
You need a 100% gain to make up for a 50% loss.
And of course, the risk profile may be different. Equal returns can be more or less appealing depending on the risk profile.
The metaphor was a coin flipping tournament. You have a bracket of players who flip a coin against an opponent. In each matchup, the player that flips a heads advances to the next round to face another opponent who won a parallel matchup in the previous round. Suppose this is a 100 round tournament, that would mean the eventual winner would have had to flip a heads 100 times to win. You might look at this coin flipper and think they are an extraordinary coin flipper. That they have some innate ability to flip a coin and make sure it lands with the head sides up. In reality, it was just random chance that they flipped the coin correctly, they do not posses any more coin flipping talent than anyone else. They just got really lucky. You can potentially look at a successful hedge fund or trader through this same lens. They have survived the proverbial coin flipping tournament and random chance was on their side.
Is it the first person to first get heads or does it have to be consecutive
It's a similar problem with the email list.
50+ years ago Scrooge McDuck also had this happen to him. He had a treasure map for gold (In Antarctica I think) which he got conditional on profit sharing and he found gold.
The map sellers ran this scam, sold heaps of different maps because someone would find gold.
I personally don't think Scrooge McDuck was just lucky though.
Your example would have made sense, if you talking about the 100 times consecutive winner in a coin flip match, with each match, the winner can be heads or tails.
Yes, the gains are real, but not for the reasons that you think.
The true driver behind that 37% gain is the Fed. They’ve been juicing the market for the past 12 years!
The fundamentals, ie Warren Buffet style investing, has not improved. And the moment that the Fed stops with its market manipulation, is when the S&P will fall.
The play is that, when the government gives you free money, then go long. And ride it until the wheels fall off.
And those returns are all net of fees.
Like a bankrupt gambler returning to the casino after getting bailed out by their parents, Melvin will be back to the shorting slot machines soon enough.
Is $2,000 GME possible? Of course it is. It's not even unprecedented considering the other businesses valued at billions of dollars with shaky business models.
It is very likely that it reaches this price during the short squeeze and crashes a day later.