fractionalhare

I would call that sufficient evidence to reject the null hypothesis that the returns are normally distributed, which is to say it's not luck. If you expand your sample size to all investment vehicles throughout history, there still haven't been anywhere nearly enough for such a track record to emerge by chance.

Elementary statistics is well equipped to distinguish between a distribution signifying luck and a distribution signifying skill. It's structurally the same as assessing normality, noise, randomness, etc.

1. You invest $100,000 into a fund which has a 1% chance of returning 100% and 99% chance of returning -100% each year.

2. You invest $100,000 into a fund which has a 20% chance of returning 100% and a 80% chance of returning -100% each year.

The possible payouts are the same. The expected values are not. Given the opportunity to invest in both with no difference in fees or other structure, would you leave your decision up to a coin flip?

It's not surprising there exist individual people who are capable of beating the market, just like it's not surprising there exist people who can play sports at an elite level. You likewise wouldn't expect every human to be able to play at the elite level.

Aggregate performance should cluster around a point of central tendency.

Yeah, that's basically the answer. Retail investors don't typically need to optimize their portfolios with bespoke investment vehicles. Their exposure and goals aren't complicated.

If you think risk-adjustment doesn't make sense as an evaluation metric, you should just sell naked puts or calls on a stock which doesn't seem volatile. You're going to generate spectacular returns for a while. Then you're going to blow up.

On the other hand a portfolio with relatively low idiosyncratic risk and low market correlation (beta) might be safely levered up to a higher absolute return than e.g. SPY with less overall risk and volatility.

Like I said...it's complicated.

You can't derive a conclusion about individual hedge funds from this. That might seem obvious to you, but maybe you'd be surprised then :)

1. Buffett bet against aggregate performance of hedge funds as an investment vehicle. If he restricted his focus to the highest performing funds of the past 10 - 30 years, he would have lost handily.

2. Buffett used absolute returns as the performance metric, not risk-adjusted returns. A portfolio with lower absolute returns but a significantly better idiosyncratic risk profile (and correlation to market/beta) can be superior to a portfolio with higher absolute returns but also higher risk.

Taken together, this means that Buffett's bet is a statement about the aggregate performance of the industry. It is not instructive for what performance is possible, or even for whether or not you should invest with the modal hedge fund (given the opportunity). It depends on investment goals and risk needs. It's also worth pointing out that "risk needs" is multi-dimensional, not just a sliding scale of how much e.g. leverage you're willing to accept. There is an entire sub-industry of hedge funds which explicitly expect to underperform on an absolute basis for long periods of time, but which service their clients with highly bespoke risk products. Clients are frequently well-informed and happy with this arrangement.

I say this because there is a tendency for people outside the industry to come away thinking hedge funds are a scam. Which...well, many are, to put it bluntly. But it's a lot more complicated and this isn't really the smoking gun you'd think it is.

This is incorrect for just about every long/short equity hedge fund.

This is to say that not everything which is profitable is enhancing market efficiency. Generally speaking: long/short strategies are preoccupied with price discovery and valuation, systematic momentum, trend and volatility strategies are concerned with arbitrage, and market makers are concerned with liquidity. These three exist on a spectrum between enhancing price discovery and enhancing liquidity. There isn't really anything inefficient about shorting too much - if that happens, it means there's widespread consensus the asset is overvalued, which is likewise a statement that there should be less of the asset at that value. The valuation and liquidity have a feedback cycle here.

In the case of GME, a directional view that could contribute to price discovery would be that GME should actually be valued on future revenues which are mispriced by the market due to a variety of factors (e.g. Ryan Cohen, digital-first transformation, etc). It would still be generous and optimistic, but it would at least be a coherent directional thesis. The process of market efficiency would be to incorporate this view when you stake with an open position, and theoretically if you're right your view will be vindicated.

There is nothing efficient about GME at $100, let alone $400.

Put yourself in the firm's position and think about this from a game theoretic perspective...what is the upside in lying? The thinking is that you might convince people to lay off the voracious buying if you make it seem like the short squeeze isn't possible because you're out? That seems like a stretch and would require navigating lots of wild assumptions about why this almost unprecedented price action is happening.

On the other hand, there is tons of downside. If the plan doesn't work and the price continues its meteoric rise, you're bankrupt. If you're caught lying, you're additionally hit with securities fraud. Then the veil is pierced and the partners are at risk of losing their money. On top of this if your investors are savvy they'll sue you for breaking fiduciary duty because you didn't close out a position that makes selling naked SPY calls look safe. This also puts the partners' private capital at risk.

It would be cartoonishly dumb to lie about closing the position instead of actually doing it.

I've only seen those accusations on reddit and twitter. The only "evidence" I've ever seen in support of those accusations is repeated citation of short interest. Short interest is an aggregate figure which doesn't track specific firms, so it can't be used to discover if an individual fund closed or opened a short position.

Retail traders can't swing that kind of volume in the underlying shares, no. But retail call buying as a proportion of total equity options volume is up massively in the past two years. The trading leverage inherent to retail call options herding together combined with the requirement for market makers to hedge the options they sell induces these huge movements. From there, momentum traders exacerbate the spark that's already lit.

As a more general aside: take everything said on Cramer's show with a grain of salt. He is a deeply unserious character in the financial space. His angle is to be provocative, not accurate.

No it didn't, because it didn't have privileged information about the securities. Just because it's a broker doesn't mean it has privileged information about the securities it brokers. Brokers do not typically have privileged information about the securities they broker. To have privileged information, Robinhood would need to be an insider to those securities. Which it isn't.

I don't know what else to tell you - your understanding of the conditions required to meet the SEC's definition of insider trading is simply incorrect. You need to revisit the specific definitions of "insider" and its impact on confidentiality and fiduciary duty.

So...not "nearly exactly" at all. Moreover Robinhood isn't even an insider with respect to GME.

You can't say this is insider trading unless you generously expand the definition of insider trading to include every kind of wrongdoing in the market. Robinhood executives didn't trade GME and didn't have any nonpublic information.

These definitions matter.

Here is a decent paper on the topic of n-sigma events: https://arxiv.org/pdf/1103.5672.pdf