Whitney Tilson is shutting down his hedge fund

[BG2008]

 

Kudos to Tilson for taking the high road and graciously choosing to close his fund.  But $1.5M a year...and I believe he may have started with more capital...for an 8.4% cumulative return over 7 years?! 

 

Mohnish didn't get paid a nickel for 10.25 years, and he's still called a bum by some.  I think all fund managers should be operating using the "Buffett Partnership" model.  Cheers!

 

Prasad,

Mohnish, is certainly impressive in that he had the integrity to make his clients whole: + 6% / annum after 10 yrs. However, 6% return in 10 yrs is a 80% gain, the S&P 500 TR has return more than that in 10yrs, so as you said, he made a profit something like $8M above expenses, all for lagging the S&P500 TR.  Just want to clarify things for real......

 

thanks

 

I've mentioned it before but it amazes me how misguided the entire "he did/didn't beat the index" logic is. When someone puts their money in a CD, they'd be foolish to then say "darn, I under performed the S&P". If one buys a government bond, I'm sure they are not thinking about "beating the index". It is about risk adjusted returns and ultimately there are tons of different products out there that offering varying degrees of risks and rewards. There is a reason one puts money with, and pays a guy like Pabrai. Maybe it's just me, but at the forefront of the list would be the fact that he is both a talented investor, and a good, honest man, so he will be prudent with my money.

 

There was a time when hedge funds were viewed as alternative investments with little correlation to the markets and security against big declines. I guess now a days there is sooooo much focus on this "beat the index" syndrome that the by-product is 90% of fund managers, guys like Ackman, are just gunslingers who redefine "value investing" so they can sell excessive risk taking as "safe" to the investors, and then swing for the fences with OPM. I have a ton of respect for guys who under perform the almighty index because they stick to their core investment philosophy and er on the side of caution with their investor's money. In relation to this thread, as nice a guy as Tilson was, he was not one of those guys. Pabrai is.

 

This is well said.  Disclaimer, I am a fund manager.  I think measuring yourself against the S&P has hazards in that it becomes the benchmark that you care about the most.  In an 8 year bull market, it forces you to take on risk that you normally will not.  It is well known that you should lower your exposure when you can't find any value.  The markets give you returns when it is available not when you need it.  Let's assume that you gave money to a manager that hold 20-40% cash and he manage to compound it at double digits, but he trails the S&P by 1-2% a year, is he a bad manager in the post 2009 era?  His plan is to deploy the capital when we experience sell off periodically.  Is he providing value add?   

 

I would say that from the LP's perspective the best value add of working with a good manager is the elimination of the risk of "buy high and sell low."  With a S&P 500 index, who knows where it will go.  With a manager that you trust, it is easier to send him money when the market and/or his portfolio is down 20% assuming that the portfolio experienced merely price movements not permanent impairments.  We have conversations with our LPs about this topic all the time.  We talk about when may be a good entry, i.e. large 15+% selloffs in market, finding opportunities is like shooting fish in a barrel, etc.  As managers, we have an inherent understanding of our portfolio's private market NAV and the current price.  It is easy for us to know when our basket has gotten too cheap. 

 

I tend to have two kinds of investor conversations these days.  The first group looks at my track record and noticed that we've held 40% cash and are very impressed by what we've done.  We spend a ton of time on my investment process and my circle of competence.  We talk about ways that family office and HNW clients can collaborate on certain co-invest deals etc.  We talk about how families can add capital over time as opportunities arose.  The second group is married to "I need my manager to beat the S&P by 3% a year."  I don't care that you hold 40% cash.  I allocate my capital to you and I expect you to beat the S&P.  I don't care that the market is very high and good value opportunities are few.  I suspect that the first group will do well over time and the second group will likely put capital into the S&P index at exactly the wrong time.

 

Lastly, I think one must also consider the absolute level of return.  If the S&P is doing 13-15% annually, it will be harder to beat.  If the S&P is hovering around 3% CAGR or negative, it tends to serve the value investor better.  Finally, are you really providing a value add if the S&P is down 3% CAGR over 5 years and you're flat during that time frame?  The early 2010s were considered the lost decade where 10 year CAGR were flat or in the low single digits.  People seem to have no memories of that anymore.  I think the LPs would rather that you be up 8-12% CAGR during that time.  I think any manager who return double digits CAGR deserve credit (assuming no risky capital allocation).  Even Baupost couldn't beat the S&P in the 90s. Does that mean that they are not good managers?  They had 10 years to beat the index and trailed the S&P 500 by roughly 5.5% a year.  The math works out to roughly 13% for Baupost and 18.5% for the S&P index. 

 

    THE BAUPOST FUND S&P 500

12/14/90 $50,000.00 $50,000.00

10/31/91 $59,787.28 $61,807.01

10/31/92 $65,471.39 $67,963.62

10/31/93 $82,134.71 $78,116.01

10/31/94 $91,217.43 $81,134.73

10/31/95 $98,430.31 $102,587.46

10/31/96 $120,583.20 $127,306.16

10/31/97 $153,193.22 $168,186.49

10/31/98 $128,220.00 $205,175.00

10/31/99 $138,845.00 $257,840.00

10/31/00 $169,995.00 $273,545.00

 

I would say the difference in this situation is you're holding cash because you can't find opportunities in the US market which has rational reasoning behind it while Tilson was holding 60% cash because he thought the world was going to end because of an elected official. One of these things is not like the other.

 

I agree that Tilson holding cash due to his political believes was not a logical investment choice.  My "rant" is more directed at the fact that world has gone partially mad over "beat the S&P" or not and I want to highlight that it can lead to some pretty stupid decision making as beating the S&P by 2% with an absolute CAGR of 0% is not that helpful to the LPs. 

 

Frankly during my experience as a fund manager, investors want certain type of exposure via a manager that can be very different than the exposure gained through the S&P 500.     

[Gregmal]

Personally I think the excuse that Tilson uses about holding too much cash because of Trump is bullshit. First, hardly anyone expected Trump to win. Literally no one. So why would you be all in cash as if it was a given? If you did think Trump would win, how in the world would you think it would be bearish when his entire platform were things like tax reform, deregulation, and pro-business? Icahn saw it right away, as did many investors.

 

I think it's just the latest round of justifying his inability to invest in the current market. Certain people have spent almost a decade being scared of their own shadow when it comes to the market, or blaming the Fed for their inability to take advantage of a very robust market. Not just being wrong but then compounding that by being short and not knowing when to throw in the towel.

 

To me, investing is a lot like fishing. Sometimes the conditions are right and you can pull in walleye all night. Other times you throw 100 casts and maybe pull in one. Sometimes you can go days and even weeks without catching anything. But patience is a necessity and knowing the landscape/environment is a huge plus. Having a passion for it also helps. And when catching fish is your job, and the walleye are not there, maybe it's time to go to the shallow end with a worm and catch bluegills.

 

With Tilson, and quite a few others, "the market" isn't an excuse. Your job is to find ideas. Finding ideas is not necessarily dependent on "the market". If ideas aren't plentiful, you can always do fixed income, merger/arb(which for the past 2 years has been filled with great opportunities), and easier, lower return strategies to at least do something for your investors while you wait for the environment to be better. What's interesting about Tilson though, and why the more I think about this, the way he closed his fund almost comes off somewhat sanctimonious, is that he was ALWAYS out there pitching his ideas. It wasn't that the environment wasn't right, it was that HE WAS WRONG. The thread is about Tilson although the same applies to plenty of others. Guys like Tepper and Loeb are so dynamic because they are constantly adapting. One minute Tepper was "balls to the wall" levered, the next he's short Europe, then going activist, then he's squeezing currencies and short bonds, etc. Granted those two are probably some of the best ever, but the contrast that with some of these slugs who just consistently get it wrong and then make excuses and you can see the difference. I also think there is a certain type of investor, the academic type, usually the ones from families with money who give them seed money straight out of Harvard are way too textbook in their approaches. They've never had to grind it out on a trading desk or get their hands dirty. They just use metrics and analytic skills they learn at business school and that only goes so far. So when presented with a market that is kind of unique, they don't know what to do.

 

Guys like Pabrai(BG too) sit back and wait for a fat pitch and when they get it their batting average is great. Meanwhile other guys are coming up with new ideas every few weeks, not getting the results, and then blaming the market. Massive difference.

[Parsad]

I think all fund managers should be operating using the "Buffett Partnership" model.  Cheers!

I completely agree. And you know, IIRC the reason Buffett chose a 6% hurdle was because that was the average 30? year treasury rate at the time.

 

What are your thoughts on that? Or even a floating annual hurdle rate that mimics the 30 year?

 

We've used 6%...Mohnish has used 6%...it certainly hasn't hurt either of us.

 

 

 

What do you use now? And what made you change?

 

We still use 6%...so does Mohnish.  We've never adjusted the hurdle and it's carried over year to year from the high watermark.  It's the most equitable way to be compensated and in the best interest of the partners.  They don't make money, we don't get paid for anything...the better we do, the better we get paid.  Cheers!

[randomep]

 

 

I've mentioned it before but it amazes me how misguided the entire "he did/didn't beat the index" logic is. When someone puts their money in a CD, they'd be foolish to then say "darn, I under performed the S&P". If one buys a government bond, I'm sure they are not thinking about "beating the index". It is about risk adjusted returns and ultimately there are tons of different products out there that offering varying degrees of risks and rewards. There is a reason one puts money with, and pays a guy like Pabrai. Maybe it's just me, but at the forefront of the list would be the fact that he is both a talented investor, and a good, honest man, so he will be prudent with my money.

 

There was a time when hedge funds were viewed as alternative investments with little correlation to the markets and security against big declines. I guess now a days there is sooooo much focus on this "beat the index" syndrome that the by-product is 90% of fund managers, guys like Ackman, are just gunslingers who redefine "value investing" so they can sell excessive risk taking as "safe" to the investors, and then swing for the fences with OPM. I have a ton of respect for guys who under perform the almighty index because they stick to their core investment philosophy and er on the side of caution with their investor's money. In relation to this thread, as nice a guy as Tilson was, he was not one of those guys. Pabrai is.

 

If I was looking for a CD I would go to bankrate.com and look at the savings/check rate averages which is prominently on the banking home page.  If someone offered me 0.1% I would say that sucks compared to the average. make sense? Every investment type must have a benchmark.

 

If I was considering an hedge fund investment I would look at a equity benchmark.  I have to compare apples with apples and oranges with oranges.  If S&P 500 is not a good benchmark then give me another.

 

As for your investment guru Pabrai, he himself on his annual lettters to LP, shows a performance graph with his funds and the S&P500 and DJIA and Nasdaq!  I mean sure he and you would defend his recent performance because he is a HEDGE fund. I can concede that but when Pabrai was killing it in 2007 did he mention that benchmarks are not a worthy or meaningful comparison?

 

And you said Pabrai sticks to his principles? Please tell me what is his investing philosophy (other than his great character, integrity etc), there have been several discussions about what is Pabrai's investment style and I am still stumped.

 

[Parsad]

 

Kudos to Tilson for taking the high road and graciously choosing to close his fund.  But $1.5M a year...and I believe he may have started with more capital...for an 8.4% cumulative return over 7 years?! 

 

Mohnish didn't get paid a nickel for 10.25 years, and he's still called a bum by some.  I think all fund managers should be operating using the "Buffett Partnership" model.  Cheers!

 

Prasad,

Mohnish, is certainly impressive in that he had the integrity to make his clients whole: + 6% / annum after 10 yrs. However, 6% return in 10 yrs is a 80% gain, the S&P 500 TR has return more than that in 10yrs, so as you said, he made a profit something like $8M above expenses, all for lagging the S&P500 TR.  Just want to clarify things for real......

 

thanks

 

Well it depends on what time frame you are examining. 

 

- If you invested with him from day 1, you're money has compounded about 9 times and beat the S&P500 TR by about 4-5% points a year. 

 

- If you examine the last 10 years, he's hit the minimum target for his fund partners and been compensated based on the LP agreement. 

 

- If you use the last 3 years, then he's demolished the index...should he be compensated exorbitantly for this short-term over-performance.

 

You can argue for or against Pabrai depending on what time frame you pick out of the air. 

 

The one argument you cannot make is that his fund design is not the most equitable for partners who invest over the long-term. 

 

And if partners are focused on only short-term...which many normally are, no matter how "long-term" minded they say they are...then they should not be investing with fund managers and go with passive investments.

 

But to answer your question as clearly as possible...yes, he deserves the compensation he receives, because it is based on him beating the set hurdle agreed upon, and getting compensated solely on the success of that...as the LP agreement and design of the fund were intended to do.

 

Alternatively, he could change the LP and set the hurdle at 10% and ask for 50% of any profits above that as the incentive fee.  But then you would still have some people say that the markets have returned 15% compounded over the last 7 years and he's only returned 10% a year!  Cheers!

 

 

[LC]

We still use 6%...so does Mohnish.  We've never adjusted the hurdle and it's carried over year to year from the high watermark.  It's the most equitable way to be compensated and in the best interest of the partners.  They don't make money, we don't get paid for anything...the better we do, the better we get paid.  Cheers!

 

Ok but, why 6%? Why not 5% or 7%?

 

In Buffett's time, 6% was the 30 year coupon.The idea (as I understood it) was that managers are paid in excess of the risk-free rate. Clients moving outside of t-bills are assuming risk. They can either pay themselves for that risk, or pay someone else, presumably a professional.

 

The real question is, why are value fund managers stuck on 6%, versus payment for the intelligent assumption of risk above the risk-free rate?

 

Note: I think his actual fee structure for the multiple partnerships varied:

33% above 6%

25% above 4%

16.6% above 3%

 

But (1) he provided liquidity back to his clients from the fund at 6% (again, the risk-free rate),

and (2) I think when he combined all the various partnerships, he adopted 6% as the rate.

[Spekulatius]

I think Gregmal hit the nail on the head. The market is not an excuse. Mr Market is here to serve you not to guide you. I do think that it is Ok to underperform a bull market that run basically on multiple expansion, but it is not excusable to lose money in such a market, by going short etc. I would also think that if you are underperforming, that you need to be able to make the case, that you are taking on less risk than investing in a market index.

[BG2008]

We still use 6%...so does Mohnish.  We've never adjusted the hurdle and it's carried over year to year from the high watermark.  It's the most equitable way to be compensated and in the best interest of the partners.  They don't make money, we don't get paid for anything...the better we do, the better we get paid.  Cheers!

 

Ok but, why 6%? Why not 5% or 7%?

 

In Buffett's time, 6% was the 30 year coupon.The idea (as I understood it) was that managers are paid in excess of the risk-free rate. Clients moving outside of t-bills are assuming risk. They can either pay themselves for that risk, or pay someone else, presumably a professional.

 

The real question is, why are value fund managers stuck on 6%, versus payment for the intelligent assumption of risk above the risk-free rate?

 

Note: I think his actual fee structure for the multiple partnerships varied:

33% above 6%

25% above 4%

16.6% above 3%

 

But (1) he provided liquidity back to his clients from the fund at 6% (again, the risk-free rate),

and (2) I think when he combined all the various partnerships, he adopted 6% as the rate.

 

I believe the 6% is closer to a risk free rate associated with the US treasury back then.  I think a manager charging a performance fee above the risk free rate actually makes a lot of sense.  In short you're getting paid for performance above what the clients can easily achieve by holding treasuries.  When I was launching my fund, I wanted to tie my hurdle to the 10 year treasure with the hurdle reset every month or every year.  After talking to enough fund admins and lawyers, they essentially told me that a floating hurdle is very had to administer.  Hence, I think today's hurdle should be closer to 2% if we apply the same philosophy.  I winded up picking a fixed mgt and performance fee structure that I thought was fair to my investors. 

 

Buffet has actually written extensively about expected returns and interest rates.  In short, he's saying that it's easier to earn more in a higher interest rate environment. 

[Rod]

We still use 6%...so does Mohnish.  We've never adjusted the hurdle and it's carried over year to year from the high watermark.  It's the most equitable way to be compensated and in the best interest of the partners.  They don't make money, we don't get paid for anything...the better we do, the better we get paid.  Cheers!

 

Ok but, why 6%? Why not 5% or 7%?

 

In Buffett's time, 6% was the 30 year coupon.The idea (as I understood it) was that managers are paid in excess of the risk-free rate. Clients moving outside of t-bills are assuming risk. They can either pay themselves for that risk, or pay someone else, presumably a professional.

 

The real question is, why are value fund managers stuck on 6%, versus payment for the intelligent assumption of risk above the risk-free rate?

 

Note: I think his actual fee structure for the multiple partnerships varied:

33% above 6%

25% above 4%

16.6% above 3%

 

But (1) he provided liquidity back to his clients from the fund at 6% (again, the risk-free rate),

and (2) I think when he combined all the various partnerships, he adopted 6% as the rate.

 

I think a better hurdle would be the index itself. The manager could keep, say 50% of the performance beyond that level.

[cmlber]

I think a better hurdle would be the index itself.

 

+1.  Which is likely to be around 6% in the long-run.

 

When Buffett benchmarked his hurdle to treasuries, there were no index funds and trading costs were much higher.  It was difficult for the average investor to replicate the index.  And treasury yields were decent, so treasuries, relative to equities, were a more reasonable "passive" investment vehicle. 

[racemize]

We still use 6%...so does Mohnish.  We've never adjusted the hurdle and it's carried over year to year from the high watermark.  It's the most equitable way to be compensated and in the best interest of the partners.  They don't make money, we don't get paid for anything...the better we do, the better we get paid.  Cheers!

 

Ok but, why 6%? Why not 5% or 7%?

 

In Buffett's time, 6% was the 30 year coupon.The idea (as I understood it) was that managers are paid in excess of the risk-free rate. Clients moving outside of t-bills are assuming risk. They can either pay themselves for that risk, or pay someone else, presumably a professional.

 

The real question is, why are value fund managers stuck on 6%, versus payment for the intelligent assumption of risk above the risk-free rate?

 

Note: I think his actual fee structure for the multiple partnerships varied:

33% above 6%

25% above 4%

16.6% above 3%

 

But (1) he provided liquidity back to his clients from the fund at 6% (again, the risk-free rate),

and (2) I think when he combined all the various partnerships, he adopted 6% as the rate.

 

I think a better hurdle would be the index itself. The manager could keep, say 50% of the performance beyond that level.

 

I agree, it is just a little hard because it moves around a bit.  E.g., at least with 6% when the market goes down, but you go down less, you aren't taking money from partners.  You could try to do a rolling period, but that gets complicated due to partners moving in and out.

[thepupil]

A potential drawback of absolute hurdles is the nature of equity returns, where average and median annual returns are higher than the long term CAGR; this is because stocks generally make more than their long term return in a given year and then have rare years where there is a big drawdown. (high yield is the same way, high yield bonds never really return their coupon, they generally tighten and outperform their yield and then blow up occasionally)

 

From Jan 1 1989 - Dec 31 2016, the S&P 500 returned 10.1%. 23 / 28 years were positive (82%) and 17/23 (60%) were above the long term 10.1% return.

 

Assuming performance in line with the index, having an absolute hurdle of 6% will pay a median incentive fee of 1.3% and an average of 2.0%. With a strictly absolute fee (no hurdle), these values increase to a whopping 2.5% and 2.9%. this is the appeal of passive / no incentive fees. people don't want to hire a manager at 50bps and 20% over 6% (which sounds very reasonable) when in the average year you'll be starting out 250 bps behind the benchmark (unless there is VERY high confidence in the strategy or it's truly differentiated). This is particularly hard when you as an LP are comp'd against the benchmark!

 

Over very long periods of time (times which include one of the big drawdowns), the high water mark helps mitigate this phenomenon dramatically, but in this 28 year period there is are very long stretches of positive returns (1/1991 - 12/1999), (1/2003 - 12/2007) (1/2009 - present). So if you hire someone at the beginning of one of these time periods, you can end up paying a boat load of incentive for no "value add".

 

The opposite is true if you hire someone before a big market drawdown. The market return from 1/2000 - to 12/2008 was -28% (-3.6%) so if someone made 7% a year and had a 6% hurdle, they'd make very little incentive relative to value add.

 

In my opinion the most LP friendly benchmark is one that most closely resembles the managers strategy (to avoid years where there is a big mismatch and paying a huge incentive fee for no value add) OR an absolute hurdle resembling the long term return of the strategy's asset allocation with a multi-year clawback / vesting schedule and HWM (these mitigate this issue if the LP is adequately long term in outlook/duration of investment).

 

these structures are rare. it's really hard to build a business around them. Another solution  is to have family office / HNW clients with an absolute hurdle and institutional clients with an index hurdle that diversifies your business. So when you lose 15% when the market is down 30% (you may have done a great job, despite losing money), your institutional clients are happily paying you 300 bps.

 

EDIT:

to take the data a bit further back, the median return for the S&P from 1952 -2016 is 10.8% whereas the CAGR is just above 7%. not taking into account a HWM, 20% over 6% pays a median incentive fee of 96 basis points and an average of 1.6%.

 

the average 5 year rolling period return is 7.2% and the median is 8.6%, median incentive paid for index like performance with 20% over 6% drops to 50 bps

 

the average 10 year rolling period return is 6.8% and the median is 7.0%

 

the longer you go, the more closely the absolute hurdle resembles an index hurdle.

 

so as long as investors are adequately long term, a 6-7% hurdle is fair (the clawback makes the fees more long term too). But in the short term, you can pay a lot of incentive and be underperforming, which is tough to stomach for many institutional LP's (and probably many individuals too)

[Guest Cameron]

How long should an investor allow a fund manager to underperform the indexes before they redeem 5 - 10 - 15 years? If you were to underperform at a job for 5 years you surely would be fired.

[shalab]

To be honest, most hedge funds add no value to an investor especially if investing in taxable accounts. Even if they beat the index by 3-4%, most of the gains will go to pay taxes. For institutions, it may make sense as many are tax exempt.

 

Hedge funds make sense if the manager has alternative strategies or invests in different markets/industries as a diversification mechanism. It is also difficult to find people who are ethical - especially with other people's money.

 

How long should an investor allow a fund manager to underperform the indexes before they redeem 5 - 10 - 15 years? If you were to underperform at a job for 5 years you surely would be fired.

[DooDiligence]

To me, this thread is refreshing. Thanks to Tilson of course for spurring this conversation. And to many posts that are not personal from chest thumping, name calling etc. Good lesson on fees, leverage that are worth absorbing.

 

And oh, btw , heartfelt thanks to Parsad for peeling off the politics to it's own hole. Great toilet flush handle you have provided.

 

Ditto...

[Gregmal]

How long should an investor allow a fund manager to underperform the indexes before they redeem 5 - 10 - 15 years? If you were to underperform at a job for 5 years you surely would be fired.

 

If your job(the one I am employing you to do) is to responsibly manage my money, your performance against the index is irrelevant for 1 year, 3 years, 5 years, 20 years. Because I am not paying you to simply chase some collection of assets that I may or may not want exposure to. If a manager returns 50% vs 10% for the index but I found out he did it by concentrating in out of the money options, I'd probably either send him packing or allocate a much less meaningful percentage of  my assets to him. If I have a guy who consistent buys low risk value securities and can consistently return me high single digits-low teens with little market correlation, I'm there all day. If I have a couple income properties that are generating 8-10% years returns for me I don't really give a hoot what the S&P is doing.

 

Finding a good manager is much more like finding a wife than finding a stock to buy. You need to be able to trust them, and they need to be skilled with the things that are important to you. If my money is with somebody I know is talented, trustworthy, and patient, I sleep well at night knowing my money should do ok. The index syndrome to me is really just indicative of where we are in the current cycle, the prominence of ETF's, the ease with which one can make outsized returns for taking huge risks, etc. Someone mentioned earlier the lost decade; good comparison. Surely in 2011 and 2012, none of the S&P fan boys had wished the owned the almighty index. This is all very much cyclical and part of the psychological element that make markets efficient over time.

[LC]

@BG2008 - Thanks for replying. I was looking for a little confirmation because the principle makes a lot of sense yet nobody mentions it. Everyone just takes 6% because that's what Buffett used 50 years ago. As you mention, 6% was the average risk free rate back when Buffett was setting up his partnerships.

 

@Rod - I'm not sure I agree with that idea. I don't think economically it makes sense. It assumes that the client would be earning the index rate of return without the fund manager. Empirically that assumption has been shown to be false. Individual investors are pretty good at buying/selling the index at the wrong times.

[Guest Cameron]

How long should an investor allow a fund manager to underperform the indexes before they redeem 5 - 10 - 15 years? If you were to underperform at a job for 5 years you surely would be fired.

 

If your job(the one I am employing you to do) is to responsibly manage my money, your performance against the index is irrelevant for 1 year, 3 years, 5 years, 20 years. Because I am not paying you to simply chase some collection of assets that I may or may not want exposure to. If a manager returns 50% vs 10% for the index but I found out he did it by concentrating in out of the money options, I'd probably either send him packing or allocate a much less meaningful percentage of  my assets to him. If I have a guy who consistent buys low risk value securities and can consistently return me high single digits-low teens with little market correlation, I'm there all day. If I have a couple income properties that are generating 8-10% years returns for me I don't really give a hoot what the S&P is doing.

 

Finding a good manager is much more like finding a wife than finding a stock to buy. You need to be able to trust them, and they need to be skilled with the things that are important to you. If my money is with somebody I know is talented, trustworthy, and patient, I sleep well at night knowing my money should do ok. The index syndrome to me is really just indicative of where we are in the current cycle, the prominence of ETF's, the ease with which one can make outsized returns for taking huge risks, etc. Someone mentioned earlier the lost decade; good comparison. Surely in 2011 and 2012, none of the S&P fan boys had wished the owned the almighty index. This is all very much cyclical and part of the psychological element that make markets efficient over time.

 

Passive inflows seemed normal in 2011 and 2012 but I understand what your saying. If someone is returning me net 8-10% long term or a property is returning that long term I wouldn't care about the S&P 500 either since on average its returned 5.9% since inception.

 

Those investing in an ETF should sleep fine at night as well as long as they are holding the ETF with a long time horizon as well as adding weekly or monthly ie. 30 years.

[Packer16]

@BG2008 - Thanks for replying. I was looking for a little confirmation because the principle makes a lot of sense yet nobody mentions it. Everyone just takes 6% because that's what Buffett used 50 years ago. As you mention, 6% was the average risk free rate back when Buffett was setting up his partnerships.

 

@Rod - I'm not sure I agree with that idea. I don't think economically it makes sense. It assumes that the client would be earning the index rate of return without the fund manager. Empirically that assumption has been shown to be false. Individual investors are pretty good at buying/selling the index at the wrong times.

 

The 6% is based upon the expected of stocks at the time of BPLs formation, 1960, not the risk-free rate which was closer to 4% per "Warren Buffet's Ground Rules".  The point of the return on do nothing money is still applicable but to equities not fixed income.

 

Packer

[Guest longinvestor]

How long should an investor allow a fund manager to underperform the indexes before they redeem 5 - 10 - 15 years? If you were to underperform at a job for 5 years you surely would be fired.

lol. This thread reads like a bill of rights of managers of opm. If you read some of the comments, it's all the fault of the investor. Not leaving the money in the hands of the manager for a long time, being fickle minded, demanding annual performance for paying annually etc. Them poor souls need saving from selling and buying the index at the wrong times. The biggest joke is name dropping Buffett partnership from 50 years ago. It doesn't matter that Buffett wound up the partnership for some of the same reasons as Tilson today. Buffett was early even then. His investors would have lost money had the partnership continued. Denial does last a long time. ;)

[Guest Cameron]

How long should an investor allow a fund manager to underperform the indexes before they redeem 5 - 10 - 15 years? If you were to underperform at a job for 5 years you surely would be fired.

lol. This thread reads like a bill of rights of managers of opm. If you read some of the comments, it's all the fault of the investor. Not leaving the money in the hands of the manager for a long time, being fickle minded, demanding annual performance for paying annually etc. Them poor souls need saving from selling and buying the index at the wrong times. The biggest joke is name dropping Buffett partnership from 50 years ago. It doesn't matter that Buffett wound up the partnership for some of the same reasons as Tilson today. Buffett was early even then. His investors would have lost money had the partnership continued. Denial does last a long time. ;)

 

I just have never seen a fund manager who is beating the market say that investors shouldn't compare them to the market. Is investing in a hedge fund less risky than a index fund? who knows I guess.

[Gregmal]

How long should an investor allow a fund manager to underperform the indexes before they redeem 5 - 10 - 15 years? If you were to underperform at a job for 5 years you surely would be fired.

lol. This thread reads like a bill of rights of managers of opm. If you read some of the comments, it's all the fault of the investor. Not leaving the money in the hands of the manager for a long time, being fickle minded, demanding annual performance for paying annually etc. Them poor souls need saving from selling and buying the index at the wrong times. The biggest joke is name dropping Buffett partnership from 50 years ago. It doesn't matter that Buffett wound up the partnership for some of the same reasons as Tilson today. Buffett was early even then. His investors would have lost money had the partnership continued. Denial does last a long time. ;)

 

I just have never seen a fund manager who is beating the market say that investors shouldn't compare them to the market. Is investing in a hedge fund less risky than a index fund? who knows I guess.

 

I think that's part of the problem of the modern day fund manager. Marketing is probably even more important than performance. Look at Paulson. The guys had a handful of years since the crash of -20% up to even -45% type years. He's still "The guy who made a fortune shorting the housing bubble". When guys can literally pull in assets worth hundreds of millions in fees after a few years of beating the index, I'd guarandamntee that guys marketing material is guys to start calling him "The guy who beats the market". Which is why it's dangerous to rely on a manager. Very dangerous to be lazy in your vetting of a money manager. Guys that are humble and honest are rare. So I'd say it's moreso up to the individual to find a manager or a strategy that is a good fit.

[Guest Cameron]

How long should an investor allow a fund manager to underperform the indexes before they redeem 5 - 10 - 15 years? If you were to underperform at a job for 5 years you surely would be fired.

lol. This thread reads like a bill of rights of managers of opm. If you read some of the comments, it's all the fault of the investor. Not leaving the money in the hands of the manager for a long time, being fickle minded, demanding annual performance for paying annually etc. Them poor souls need saving from selling and buying the index at the wrong times. The biggest joke is name dropping Buffett partnership from 50 years ago. It doesn't matter that Buffett wound up the partnership for some of the same reasons as Tilson today. Buffett was early even then. His investors would have lost money had the partnership continued. Denial does last a long time. ;)

 

I just have never seen a fund manager who is beating the market say that investors shouldn't compare them to the market. Is investing in a hedge fund less risky than a index fund? who knows I guess.

 

I think that's part of the problem of the modern day fund manager. Marketing is probably even more important than performance. Look at Paulson. The guys had a handful of years since the crash of -20% up to even -45% type years. He's still "The guy who made a fortune shorting the housing bubble". When guys can literally pull in assets worth hundreds of millions in fees after a few years of beating the index, I'd guarandamntee that guys marketing material is guys to start calling him "The guy who beats the market". Which is why it's dangerous to rely on a manager. Very dangerous to be lazy in your vetting of a money manager. Guys that are humble and honest are rare. So I'd say it's moreso up to the individual to find a manager or a strategy that is a good fit.

 

I agree with you on Paulson, he got burnt on Sinu Forest as well, on the flip side Burry did the same trade and had only one year of underperformance (I think) and it was 2007. He was attacked by investors after outperforming for 6-7 prior years by a wide margin which I think is ridiculous. Its a case by case basis.

[randomep]

How long should an investor allow a fund manager to underperform the indexes before they redeem 5 - 10 - 15 years? If you were to underperform at a job for 5 years you surely would be fired.

lol. This thread reads like a bill of rights of managers of opm. If you read some of the comments, it's all the fault of the investor. Not leaving the money in the hands of the manager for a long time, being fickle minded, demanding annual performance for paying annually etc. Them poor souls need saving from selling and buying the index at the wrong times. The biggest joke is name dropping Buffett partnership from 50 years ago. It doesn't matter that Buffett wound up the partnership for some of the same reasons as Tilson today. Buffett was early even then. His investors would have lost money had the partnership continued. Denial does last a long time. ;)

 

I just have never seen a fund manager who is beating the market say that investors shouldn't compare them to the market. Is investing in a hedge fund less risky than a index fund? who knows I guess.

 

I think that's part of the problem of the modern day fund manager. Marketing is probably even more important than performance. Look at Paulson. The guys had a handful of years since the crash of -20% up to even -45% type years. He's still "The guy who made a fortune shorting the housing bubble". When guys can literally pull in assets worth hundreds of millions in fees after a few years of beating the index, I'd guarandamntee that guys marketing material is guys to start calling him "The guy who beats the market". Which is why it's dangerous to rely on a manager. Very dangerous to be lazy in your vetting of a money manager. Guys that are humble and honest are rare. So I'd say it's moreso up to the individual to find a manager or a strategy that is a good fit.

 

I agree with you on Paulson, he got burnt on Sinu Forest as well, on the flip side Burry did the same trade and had only one year of underperformance (I think) and it was 2007. He was attacked by investors after outperforming for 6-7 prior years by a wide margin which I think is ridiculous. Its a case by case basis.

 

I think the conclusion we can draw from this is that you cannot depend on anyone but yourself.  Someone here said you have to be vigilant when hiring someone to manage your money. You have to ultimately make a judgement on who to hire and how much to give them. Even if you buy a index fund, you are probably going to get different advice as to what index fund to buy if you live in europe or USA. So there again, you have to make a decision what index to buy or whether to buy index at all.

 

You cannot push the ultimately responsibility to anyone but yourself.....

[Liberty]

Here's the Reed Hastings letter to Tilson. Worth reading:

 

https://seekingalpha.com/article/242653-netflix-ceo-reed-hastings-responds-to-whitney-tilson-cover-your-short-position-now