http://cisdm.som.umass.edu/research/pdffiles/understandingperformance.pdf page 42 "investors must realize that 1) there is no universal hedge fund index and those that represent themselves as such differ widely in composition and performance.
Non-sense. That's like saying the SP500 is not a valid benchmark because some Chinese largecap company went bankrupt that wasn't included in the SP500.
Yes, there are many different hedge fund benchmarks. Just like there are many equity indexes, such as the SP500, Russell 2000 and Dow Jones Global Index. The main thing you are missing is that comparing the Credit Suisse or HFRX broad hedge fund index to the SP500 doesn't make much sense simply because the HF indexes comprise strategies such as commodities, credit/bonds and currencies that are not using the SP500 as a benchmark. A better benchmark for the HF indexes (IMO) would be a board, long-only global asset allocation. And THEN I would agree: Broad HF indexes don't outperform a broad, wide asset allocation index. Single managers can deliver significant alpha, but across 100s of managers that alpha disappears and you're left with a bunch of beta. Which is still good since it's somewhat uncorrelated to the SP500, but it's just beta.
Here is a simple long-only asset allocation, rebalanced monthly (i.e. not accounting for transactions costs nor for taxes), plus (!) this obviously uses the benefit of hindsight. I assume when accounting for 2/20% fees this would come very close to replicating the beta of the Tremont/Suisse index. Data through Aug 2009, log scale: Long Term Bonds 10% Short Term Bonds 5% HY Bonds 5% REITs 5% Short Bias Fund 10% International Stocks 4% Total Stock Market Index 7.5% Emerging Markets 3.5% CBOE Put Write 5% Managed Futures 20% Rogers RICI Total Return 10% Gold 5% Gold Stocks 5% Dollar Index 0% AMZ MLP Index 5% Total 100%
This is true. In order to 'beat the market' in the last 10 years all one had to do was to stay out of the market and buy stuff like gov bonds or corporates. It really didnt take a genius to beat the market. My hat goes off to people who beat the market by a significant amount but by staying close to 100% in stocks
Very nice. Is this your own work, or taken or adapted from another author? Not a criticism, I'm just curious.
Michael Moore said he kept all his money in a savings account. He probably beat the market ever since he got rich
I just played around with the numbers until the results looked good. And I tried to add as many beta sources as possible. That's why the results are to be taken with a huge grain of salt. I do not advocate this allocation as a "perfect" one for anyone going forward and I strongly suggest everyone to do their own homework.
Very nice, in any case. Always pleasant to see <i>signs of intelligent life</i> on E'trader... BTW Have you read Andy Lo's replication book? It's worth a look. http://press.princeton.edu/titles/8635.html