The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: arebelspy on September 02, 2012, 08:29:28 AM
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http://assetbuilder.com/andrew_hallam/couch_potatoes_crush_hedge_funds
Interesting article comparing a "couch potato" portfolio consisting of Vanguard Index Funds versus hedge funds.
Here's what the couch potato portfolio consists of:
Rebalanced once a year, the Couch Potato comprises half of its assets in the Vanguard Total Stock Market Index with the other half in the Vanguard Inflation-Protected Securities index. It’s a simple combination of stocks and bonds, with expenses running just 0.19 percent a year.
And here's the results over the last decade (sorry for the messy formatting, table doesn't copy/paste cleanly! But I think you can still figure it out.. Much cleaner table in the link above):
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 to 8/9/12
Couch Potato Portfolio +16.2% +10.5% +3.6% +9.9% +8.8% (20.4%) +19.9% +10.6% +6.7% +8.1%
HFRX Global Hedge Fund Index +13.4% +2.7% +2.7% +9.3% +4.2% (23.3%) +13.4% +5.2% (8.8%) +1.8%
Couch potato wins every. single. year. 10 years running (counting 2012).
Most telling part to me:
Despite how far the reported hedge funds have lagged the Couch Potato over the past decade, most hedge fund investors would be thrilled with these poor results—because the majority of hedge funds did worse than the hedge fund index average.
...yeah. I'll stick with index funds.
Whole article is worth the read, if you're into that sort of thing.
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http://assetbuilder.com/andrew_hallam/couch_potatoes_crush_hedge_funds
Couch potato wins every. single. year. 10 years running (counting 2012).
Thanks for sharing this article. Great timing, too -- this weekend I just finished moving my investments from an adviser with LPL Financial over to Vanguard. As soon as I sell the funds, I'm going straight into VFIAX for individual investment and their VTIVX targeted retirement Roth. Both funds are very stock-centric, the VIPSX may be a good conservative fund option to offset the majority stock holdings.
I'm curious if the Vanguard investors on the forum stick with one or two funds exclusively?
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Good for you. Your returns over the rest of your life will be all the congrats you need. ;)
I'm curious if the Vanguard investors on the forum stick with one or two funds exclusively?
That depends on an individual's AA preferences. For example, one may want a small (5-10%) amount of a real estate index/etf. Another may not care.
Typically I'd figure 2-4.
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You have only two cases: hedge funds vs the Vanguard index funds mix. Which begs the question: do other sorts of funds, for instance value funds, do even better?
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You have only two cases: hedge funds vs the Vanguard index funds mix. Which begs the question: do other sorts of funds, for instance value funds, do even better?
Yes, that's what this article focused on. I don't think one article could cover every single investment scenario. There are others that discuss, for example, value funds vs. growth, etc. Or you could do your own research, especially since you can use those numbers to compare hedge and vanguard index versus whatever specific niche you're investigating.
Either way, I think comparing these two is interesting, as it's a typical argument: professional hedge managers versus index investors. Hard to argue with the results, IMO, though some still do.
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I moved all my savings to vanguard a month or two ago and use three index funds, US, international, and bonds. Wish I could move my 401k there, but will settle for mimicking the mix at Fidelity with the 401k.
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Yup, I'm still in the process of moving to a 3 fund portfolio. I've got the TBM in the Roth, along with some individual stocks that, once sold, go into the bonds, and TSM and TISM in taxable. I just have a couple more investments to sell and transfer to Vanguard before I can kind of put it on an autopilot AA-rebalance plan, which I'm looking forward to.
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...and TSM ... in taxable...
It was a wise move to have placed TSM in a taxable account since the Taiwanese FTW is 20%. Make sure you're reclaiming part of that on your taxes, if it isn't already done for you by your brokerage.
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http://assetbuilder.com/andrew_hallam/couch_potatoes_crush_hedge_funds
Most telling part to me:
Despite how far the reported hedge funds have lagged the Couch Potato over the past decade, most hedge fund investors would be thrilled with these poor results—because the majority of hedge funds did worse than the hedge fund index average.
...yeah. I'll stick with index funds.
This is a poor treatment, with little true analytic value because of a cherrypicked subindex and no transparent methodology for comparison.
There surely are hedged vehicles that have underperformed their benchmarks, and they are often punished by their investors (increased redemptions, cries to increase the high water mark, etc).
Sadly, over the last decade, a public ignorance has been cultivated as a result of some high profile fund failures and management malfeasance.* The media and various groups on both sides of the isle pounded "hedge funds" and contorted the reasons as to why we choose to invest in them - all the while thousands of organizations used reputable vehicles for exactly their intended purpose.
Contrary to popular myth, some vehicles are engaged because of index like returns with vastly reduced volatility. For others, the appeal is to gain marked exposure to non-correlated assets with vastly different return characteristics than "stocks and bonds": venture opportunities, local debt or equity exposure (public or private), corporate restructurings, private real assets, etc.
For some institutions, and HNW individuals, the risk adjusted returns are, in fact, far superior to many opportunities afforded non-accredited investors. Is that unfair? Only if you discount that there exist index funds with essentially no management fees that would've been a HNW pipe two decades years ago. Hedged vehicles, and indexed ones, are intended for sometimes for similar purposes, but often for differing ones, such that simplistic comparisons, as in the posted article, are misleading, at best. The article smacks of total ignorance of the asset class and its subclasses.
*(Does anyone recall B Madoff's hedge fund? You shouldn't: he never ran one.)