Wall Street and hedge fund analyst: "Financial markets are rigged" | Hacker News Reader

Wall Street and hedge fund analyst: "Financial markets are rigged"

reddit.com

47 pointsnextparadigms27 comments

Better title:

"Anonymous Internet commentator: Here's a bunch of common knowledge you can glean from any basic investment book. I'll omit the half that makes my argument look bad. Also, I can pretend to be someone who wouldn't naturally agree with you."

I don't know why the Internet eats this stuff up. It might be fun to go to conservative-monoculture forums and start posting: "I am an OWS organizer. I'm only here to appear more virtuous than my friends, and also to sleep with girls who have weird piercings and tattoos."

Politics articles in general are an utter black hole for intelligent discussion, but this one is also a portal into a completely new dimension of pointlessness.

The only thing correct in that article is that the guy is a "first-year analyst".

It's as if he's only read a book or gone through some terribad training and has no idea the size, time horizons and liquidity preferences over which different market participants operate.

He equates short term trading with investments for pensions and makes ad-hoc incorrect claims about market efficiency.

He has no idea about the current market. "2/20" for anything but the very best hedge funds is long gone. It is not even close to being the industry standard.

He completely fails to grasp that hedge funds, unlike most other market participants, have no recourse to systemic help or support. If they make mistakes, if they underperform or if investors just feel like it (flight to quality) and remove liquidity, then can fail. Since 2007, thousands of hedge funds have failed and closed. They represent one of very few places in the financial industry where classical capitalism (ability to fail) is allowed and still works!

The post is basically FUD trying to overwhelm the uninformed or naive with jargon.

And all the things that come from reddit are just as over-dramatic:

"The finance industry is a complete scam"

"you have absolutely no chance"

"you're paying ridiculous spreads"

"you are paying exorbitant fees."

"you are utterly screwed"

"You have no idea"

unpersuasive. You go to the casino and sit down at the poker table, some of them are going to be pros or very skilled people who will try to manipulate you. Is the game rigged against you? As much as they can within the rules of the game.

Second, on average, HFs recently have little performance edge. They had an edge during the dot-com burst and earlier, when they were smaller. Lackluster returns and frequent blowups belie the notion they have the inside track.

A few of the hedge fund guys are legitimately brilliant, with a consistent edge.

A few are bad eggs and push the envelope, e.g. Galleon.

A few have an inside track, e.g. HFT guys who are collocated and see everything a split second before everyone else.

Most HFs have little or no sustainable edge, and just take big fees from gullible people until they blow up.

If you don't think you can play against these guys, just invest in bond and stock index funds and ETFs. You won't do much worse, and you won't be risking blowups.

There's been a lot of looting the last few years, blatant stealing of customer funds at MF Global, bailouts, insider trading by Congressmen, CEO pay, private equity extraction, would focus on those guys. Mostly hedge funds are a convenient target. If you want to target something, target specific practices that are a problem, not specific actors.

(the only real scandal is the ultralow tax rate paid by HF managers on giant earnings - thank fully-paid-for Paul Ryan and Eric Cantor)

I started reading this, then skimming, then came to "You have better odds going to a casino and playing slots, the worst-paying game in the house, but still better than the stock market" and decided that this piece is a rant by an ideologue.

That statement is just flat out wrong, and ridiculously so.

401(k) accounts amount to an enormous subsidy for the financial industry. The whole system is structured to discourage competition and funnel money to the largest financial services companies, because employers require you to use a specific company with a limited choice of investment options. Health insurance being tied to employment causes similar problems there. OWS should be rallying against stuff like this instead of police brutality, which seems like the current focus.

This. This is the real rigging: your company doesn't care what fees your 401(k) charges you. They'll give you an S&P500 index fund with a 1.2% expense ratio. Given that you can get that for 0.06% elsewhere, you can bet that a good chunk of the rest is yacht money.

Fortunately, you can roll over your 401(k) to an IRA when you change jobs. Vanguards' ain't too shabby. Or pick a brokerage and get your own stocks. You don't need to care about a high-frequency traders' 30-second impact on the market if you're not selling your portfolio for 30 years.

He has two points with which I agree:

(a) many investing strategies which rely on frequent trading or high leverage are not available to retail investors because of commissions, spreads, or taxes;

(b) (i) mutual funds etc. are poor investments because of the fees they charge; and (ii) because 401(k)s often force you into mutual funds, 401(k)s are often poor investments.

Of those, I'm only angry about (b)(ii), because the government forces me (with tax incentives) to put money in my suboptimal 401(k).

The rest is just a question of understanding what game you're playing and acting accordingly. I don't see why I should be offended that somebody else gets better access to the markets than I do, any more than I'm offended that my friend who works at the donut shop gets free donuts.

Can someone smarter than me explain how exactly 401k fees are assessed? My wife's 401k has $3 taken out of it as a fee once a quarter; my 401k doesn't even have that. Or are the fees built into the returns? (e.g., my 401k is up 5% for the year, but without the fees it'd be up 6% or something like that?)

don't most 401ks offer index funds?

They also have the all cash option, which by itself offers a very good return if you factor in matching and tax benefits. And if you switch jobs somewhat frequently you can roll it over into a no fee IRA you manage without necessarily worrying about the state of the market when you do the rollover.

My Fidelity 401(k) had an S&P 500 index fund. Expense ratio was something like 1.2%.

Yes, you can get those for 0.06% as an ETF. Yes, the extra 1% is probably substantially yacht money.

Right, so the corollary seems to be:

"Unless you are bignum rich, the best investment strategy is to put your money into a market index fund (Vanguard 500) and wait..."

"You have better odds going to a casino and playing slots, the worst-paying game in the house, but still better than the stock market."

I can calculate what the odds are for slots, but I would love for someone to post some real numbers for what the stock market odds are.

Not to nitpick a point that's essentially irrelevant, but he's totally wrong. Slots are often among the best paying games in the house. On the Vegas strip it's not hard to find ones that pay 99.9% back, and progressives with a big jackpot pay over 100% frequently.

It's not the same kind of mechanism, so you can't really provide odds.

I guess you could look at the S&P as an average measure of return.

Kinda my point. The comparison is meaningless. I also think he's wrong, but don't know how to even begin demonstrating that.

Good data is hard to come by. You could say the market average, but there's the obvious question of distribution: if hedge funds, "0.1%", or the Queen of England are doing far better than average, so that the distribution is skewed, then you the average is a poor statistic for what the common man can expect to get.

Attempts to calculate that for the myriad different investment strategies are exactly why we have such a large and complex financial system.

There's a lot there that's emotionally stated and designed to draw ire without actually being correct, alas.

Some of these services, especially pension funds, will invest into hedge funds, who take an additional 2 and 20 (meaning 2% of assets plus 20% of capital gains). What this means is that if you go any of the traditional retail routes, you are utterly screwed facing off against the hedge funds.

Two of the most completely unreasonable sentences joined together. Hedge funds' ruinous fee structures give hedge fund investors an advantage...?

Uh, no.

Why is this biased anonymous junk on HN frontpage?

I'm guessing people wanted to talk about it or use the audience here to verify the quality of it.

Some actual numbers to provide some context. Out of 2128 HFs I can see on the Bloomberg...

Total 5 year return: 650 > 3%, 399 > 25%, 56 > 100%, max 322.84%.

Total 1 year return drops to: 498 > 3%, 51 > 25%, 2 > 100%, max 278.64%.

273 of them appear to have been around for >= 10 years. Out of those 273 the total 10 year return: 244 > 25%, 135 > 100%, 51 > 200%, 14 > 500%, 4 > 1000%, max = 1907.18%.

edit: clarity

Possibly the best rant in support of the book "Intelligent Asset Allocation" by Bernstein.

Much of this is not true. This is in an occupy subreddit so be careful what you see in comments and what gets upvoted...

One thing that he doesn't make clear: hedge fund fees are 2% annual management fee PLUS 20% of any upside (very similar to VC's)

After fees, index funds often perform better than hedge funds: http://www.nytimes.com/2007/03/04/business/yourmoney/04stra....

Also - relevant is this long bet: http://longbets.org/362/

“Over a ten-year period commencing on January 1, 2008, and ending on December 31, 2017, the S & P 500 will outperform a portfolio of funds of hedge funds, when performance is measured on a basis net of fees, costs and expenses.” PREDICTOR Warren Buffett

That NYT article is from 2007.

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