Another Spin at the Wheel
Good news for investors who like to lose all their money, “John Meriwether, the hedge fund manager and arbitrageur behind Long-Term Capital Management, is in the process of setting up a new hedge fund – his third.” What’s that, you ask, didn’t his first fund lose all its money? Why, yes. And didn’t the second fund fold because it lost a ton of money? Yes, quite so. So how will this new one be different? It won’t! It’s “expected use the same strategy as both LTCM and JWM to make money: so-called relative value arbitrage, a quantitative investment strategy Mr Meriwether pioneered when he led the hugely successful bond arbitrage group at Salomon Brothers in the 1980s.”
The way this works is that you identify arbitrage opportunities such that you make trades you’re overwhelmingly likely to make money on. But those opportunities only exist because the opportunities are very small. So to make them worth pursuing, you need to lever-up with huge amounts of debt. Which means that on the rare moments when the trades do go bad, everything falls apart: “The strategy typically has a high ‘blow-up’ risk because of the large amounts of leverage it uses to profit from often tiny pricing anomalies.”
As a friend puts it, this strategy is “literally the equivalent of putting a chip on 35 of the 36 roulette numbers and hoping for no zero/36.” But you’re doing it with borrowed money. I’m not a huge believer in human rationality, so I totally understand how this scam worked once. That he was able to get a second fund off the ground is pretty amazing. If he finds investors for a third spin around the wheel I’m going to propose confiscating all the rich peoples’ money and giving it to capuchin monkeys.
56 Responses to “Another Spin at the Wheel”
Register
RSSLogin
Topic Cloud
ArchivesBlog RollAbout Matt YglesiasContact Me
Donate
October 23rd, 2009 at 9:24 am
No, no, no, no, no. Give it to meeeeeeeeee!
October 23rd, 2009 at 9:49 am
Madness.
October 23rd, 2009 at 9:54 am
It’s all going according to plan.
October 23rd, 2009 at 9:56 am
literally the equivalent of putting a chip on 35 of the 36 roulette numbers and hoping for no zero/36
No, not literally.
October 23rd, 2009 at 10:11 am
Have you ever bought one of those $100 charity raffle tickets where you can win a house or a car? For the investors I think that is what we’re talking about. You take 2% of your net worth and invest in this fund. It could go bust or you could make a tidy profit.
Now, I can understand it from the investors perspective, but who is going to loan this guy money?
October 23rd, 2009 at 10:25 am
Al is right. Don’t become a Biden on “literally”.
October 23rd, 2009 at 10:29 am
Al’s pedantry tries but fails. Since “literally” modifies “the equivalent,” the error isn’t as egregious as he thinks.
October 23rd, 2009 at 10:44 am
Maybe Meriweather is like Tarantino: early success with a collaborator, then he thinks he can go it alone, and the dialogue just never has the same glitter after that.
October 23rd, 2009 at 10:45 am
Simple question: are most of Meriwether’s investors really rich folks gambling foolishly with their own money, or are they money managers raking in huge fees by gambling with other people’s pension funds, municipal funds, etc.?
October 23rd, 2009 at 11:00 am
If something is figuratively the equivalent of something else, then it is comparable in some relative way. It’s a comparison or an illustration or an analogy or something like that. If something is literally the equivalent of something else, then the two are “equal in value, power, efficacy, or import”, or “equal in value. Now only in more restricted uses: (a) of things regarded as mutually compensating each other, or as exchangeable; (b) of things of which one serves as a measure of value for the other.”
http://dictionary.oed.com/cgi/entry/50077344?single=1&query_type=word&queryword=equivalent&first=1&max_to_show=10
October 23rd, 2009 at 11:04 am
are most of Meriwether’s investors really rich folks gambling foolishly with their own money, or are they money managers raking in huge fees by gambling with other people’s pension funds, municipal funds, etc.?
I would assume it’s both. That being said every good pension fund should have some money invested in these things as a simple matter of diversification. You might say – I only want my pension fund invested in government bonds!
Well that’s very risky – if the state of California promises a pension of 80% of your 3 highest years salary and the median retiree was making $65k then you would need enough assets to pay $4,300 a month. However, if you invested only in bonds and a bout of inflation hit, such that the median salary of a California state retiree was climbed to 90,000 then you would need to pay out $6,000 a month, with a bond portfolio taking a big hit from the rise in inflation you would not be able to make your promised pension payments.
No matter what a pension fund invests in there is always risk – stocks, bonds, cash, gold, real estate, oil, etc. the only way to hedge this risk is to invest in a variety of asset classes including things like hedge funds.
October 23rd, 2009 at 11:04 am
Even so, the denominator is not big enough for literal equivalence. It is probably modeled more like a one in 1,000 or 10,000 chance of losing all the borrowed money.
October 23rd, 2009 at 11:12 am
Yes the first two funds failed but:
How much money (which was not simply reinvested there) did they make for their investors during the life of the funds and
How much of those “losses” for either tax purposes or because of buyout were really losses at all?
To put it another way: if I invested 100 with XYZ and over five years took out 500 (far beyond the average return) and then when the markets turned and I lost 80 mightn’t I still be ahead of the game?
My understanding is that the funds offered exceptionally large returns, far outpacing the markets, until their failures, and perhaps sufficient to justify a second spin of the wheel.
(I can hear “Aside from that how did you like the play Mrs. Lincoln?)
Also it is clear that the investment strategy is dependent upon a specific set of market conditions and that the funds failure lay chiefly in those conditions rapidly changing and not because the base strategy was unworkable.
The current market it appears offers the optimal conditions for their strategy in which case investing might not be quite as insane a gamble as might first appear, no?
Of course the proof will be in the pudding.
And, because “reasonable” limits on the funds’ ability to leverage would spoil their game, in the strength of Obama’s reforms, yes?
Thanks.
October 23rd, 2009 at 11:14 am
Doug is probably right. Not to mention odds of losing are actually 37 to 1, so you’d have to play the greens too.
October 23rd, 2009 at 11:17 am
Question please, your hypothetical assumes you know when to get out of the game.
October 23rd, 2009 at 11:18 am
No, no, no, no, no. Hell, the whole point to this fund is that it isn’t diversified. They are invested 100% on the basis that the market will correct whatever inefficiency that their stat-arb guy found. As LTCM found out, it’s quite possible to go broke before that actually happens.
October 23rd, 2009 at 11:28 am
Paging Mr. Taleb…
Have you ever bought one of those $100 charity raffle tickets where you can win a house or a car? For the investors I think that is what we’re talking about. You take 2% of your net worth and invest in this fund. It could go bust or you could make a tidy profit.
But it’s not like that at all. In your raffle scenario you’ve got a small chance of making a really large profit, and if you lose you don’t lose much. LCTM is the opposite: you’ve got a very high chance of making a small profit on each trade, but if you don’t you’re screwed. It’s the equivalent of betting your house to try to win $100, not the other way around.
October 23rd, 2009 at 11:37 am
No, no, no, no, no. Hell, the whole point to this fund is that it isn’t diversified.
Yes, but the wealthy individual or pension fund is diversified in part by investing in this fund. If I’m Calpers I have my money in Google and GE and Toyota and Hong Kong office buildings, Canadian timber land, German government bonds, etc. and some money in hedge funds.
It’s the equivalent of betting your house to try to win $100, not the other way around.
From that point of view of the fund that’s true. From the point of view of those investing in the fund – who have numerous other investments in any number of asset classes, putting %0.25 into a hedge fund is a good way to cover all your bets.
October 23rd, 2009 at 11:37 am
Also, in the spirit of Mr. Taleb, I should note that the roulette analogy is an example of what he terms the “ludic fallacy.” In roulette you have defined probabilities that are known beforehand. The can calculate the exact risk you’re taking by putting a chip on 35 numbers. You can’t, however, calculate the risk of this stupid strategy blowing up. By putting money in this fund you are accepting an unknown and unquantifiable risk of losing everything. So it’s not actually equivalent, literally or otherwise.
October 23rd, 2009 at 11:39 am
No, no, no, no, no. Hell, the whole point to this fund is that it isn’t diversified.
Yes, yes, yes. It doesn’t matter that this particular fund is not diversified — his point was that a pension fund (or any portfolio, really) should be diversified across asset classes. You therefore can invest in individual funds or asset classes that are not diversified (ex. gold, oil, Treasuries, etc.) because overall, your entire portfolio contains enough non-correlated asset classes that you are diversified. (Ex. you’d never want to invest only in real estate, but if you have, say, 10% of your portfolio in real estate, it can act as a counterweight to other asset classes even though your real estate investment is not in itself diversified).
October 23rd, 2009 at 11:41 am
[...] been some surprise among a number of bloggers that John Merriweather, of ignominious Long-Term Capital [...]
October 23rd, 2009 at 11:42 am
By putting money in this fund you are accepting an unknown and unquantifiable risk of losing everything.
Well, that’s true of putting your money anywhere — it’s even true of burying your gold bullion in the backyard.
The key to hedging that risk, therefore, is not to put “everything” in, but to restrict the investment to a small percentage of your portfolio that you could afford to lose.
October 23rd, 2009 at 11:45 am
Matt, regarding this post’s actual (as opposed to ostensible) topic:
1) You don’t know anything about it.
2) You are not called to know anything about it.
3) This kind of shit has long gotten way beyond tiresome.
Therefore, cut it the fuck out.
October 23rd, 2009 at 11:46 am
called upon
October 23rd, 2009 at 12:21 pm
@20: Hedge funds aren’t an asset class. They’re an intermediary that actually leaves you invested in other assets, but you don’t necessarily know which, or whether they’re correlated with your other positions, or how. And you pay significantly for this privilege.
If you were buying *bonds* issued by a leveraging hedge fund, that would be an asset — and a damned risky one, too, but if there’s enough yield in them it might be worth putting a little of your portfolio there. But actual shares of equity in the fund are just slightly disguised shares in whatever the fund is invested in, the same way shares in GM are shares in factories for making cars.
October 23rd, 2009 at 12:27 pm
you’d never want to invest only in real estate
Well, I don’t think it’s a good idea, but there are in fact quite a lot of people who make leveraged investments in real estate for far more than their net worth. They’re often called “mortgages”. Hard as it is to believe, this reckless investment strategy is even subsidized by the government through tax breaks!
October 23rd, 2009 at 12:37 pm
I love this quote. It is perfect. “Honey, I lost the kid’s college fund in roulette. My investment strategy was dependent on the ball never landing on zero and my failure lay chiefly in that condition rapidly changing and not because my base strategy was unworkable. Now that the ball is back to a steady pattern of not landing on zero, I think the time is right to mortgage our house and try again.”
October 23rd, 2009 at 12:41 pm
Chris,
What you described is a mutual fund not a hedge fund.
A mutual fund would buy shares in GM or Apple, it would not be allowed to short Apple, borrow Apple shares on margin, or buy puts and calls. A hedge fund would be allowed to short, buy on margin, buy puts and calls, etc. That’s the difference.
October 23rd, 2009 at 12:46 pm
The idea of diversifying by investing in a hedge fund is comically stupid. You can get all the diversity you need through an S&P index fund.
As to the idea that even treasury bonds are risky — well, sure, in an absolute sense, everything in the world has some degree of risk. But compared to what? “No, I never wear a seatbelt — seatbelts aren’t safe enough for me.”
And if you actually think you should put money in a hedge fund because treasury bonds aren’t safe enough?? “Yeah, instead of wearing a seatbelt, I just balance an open tray of flaming acid on my head.”
This thread is a goddamn treasure trove.
October 23rd, 2009 at 12:53 pm
Pender,
Depending on the fund just because a fund lost money doesn’t mean it was a bad investment.
To illustrate I’ll use a personal example:
You started working for Apple 10 years ago and you have a kid about to head off to college next fall. Due to all your stock options and grants you now have $2,500,000 in Apple stock that you plan to use for retirement and to pay for your childrens education. But, you’ve seen what happened to the people at Lehman, Bear and all your tech friends back in 1999-2000 – you’re worried you may loose all your money.
So, what can you do? We’ll you can “invest” $50,000 in Apple puts with a strike price of $180 a share. You will have the right, but not the obligation, over the next year, to sell your Apple stock for $180 a share. If Apple goes to $170 or $120 or even $50 then your losses will be protected by your hedge. But, what you really hope is that in a year Apple stock is at $250 a share and your puts expire worthless.
Would you say that someone who “lost” money on his Apple puts made a bad investment? Or do you think it was a wise choice to hedge his bets?
October 23rd, 2009 at 1:00 pm
The idea of diversifying by investing in a hedge fund is comically stupid. You can get all the diversity you need through an S&P index fund.
Huh? To diversify you need some investments that do well in a down market. If the S&P plunges by 40 or 50% you need something in your portfolio that can help mitigate the losses. Many hedge funds specialize in shorting stocks such that they do very well in a down market.
For example you could have a portfolio that’s 45% stock, 45% bonds and 10% in hedge funds that specialize in doing very well when the stock and/or bond markets are weak. So, if the S&P goes up 10% you make money on the 45% of your portfolio that’s in stock and loose a little money on the 5% that’s in hedge funds. But, if the S&P is down 40% your hedge funds may be up 200% so instead of loosing 16% of your portfolio you only loose 6%.
October 23rd, 2009 at 1:19 pm
JMO, that makes sense if you’re talking about a natural long looking to hedge the specific thing he’s long on — like a corn farmer shorting corn prices.
The problem with the analogy is that there are no natural positions that are offset with Meriwether’s bond arbitrage strategy. You’d have to imagine someone whose livelihood idiosyncratically depended on there not being miniscule “inefficiencies” anywhere in the broad bond market of the type that Meriwether tries to exploit. Maybe you have a better imagination or more worldly experience and you can think of such a person, and if so I’d be curious to hear about it.
(I use the scare quotes because Meriwether has repeatedly proven that his trades carry substantial risk in practice, which suggests that the discrepancies may not be susceptible to relatively riskless arbitrage and are not “inefficient” in that sense.)
I will grant that the closure of the fund (and the loss of 44 percent in a year) does not by itself conclusively establish that it is a losing gamble over time — we’d need to see the aggregate gains and losses, and of course even that can’t banish all doubt. But it’s my impression that he’s just a classic bad-tail gambler of the type that Taleb has made a profession of skewering, even though he has an elaborate story about why each bad tail doesn’t really count for one reason or another.
October 23rd, 2009 at 1:33 pm
JMO, have you ever taken a class in this stuff? The general academic consensus is that, with few exceptions that are not available to the average investor, the only way to make expected returns above the riskless rate while keeping variance as low as possible is to go long on the market — i.e. have a portfolio with a high beta. The higher the beta, the higher the expected return: expected returns minus riskless returns varies directly with beta. You can’t “hedge” against beta without also hedging against positive returns. Hedge completely against beta and you’re at the riskless rate of return, plus you’ve paid a ton of transaction costs.
Unless you’re powerful enough to manipulate the market, willing to do illegal things or a freakish investment prodigy (and none of us here are), you’re a sucker for doing anything other than some combination of riskless lending/borrowing and index fund long/shorting.
October 23rd, 2009 at 1:35 pm
You can get all the diversity you need through an S&P index fund.
Oh dear god no. That’s just one asset class — large-cap US equities. What about median and small caps, Treasury bonds, investment grade corporate bonds, international and emerging equities, commodities, real estate, cash? What do you do if the S&P 500 crashes approx. 40% in a year, as it did in 2008?
As to the idea that even treasury bonds are risky — well, sure, in an absolute sense, everything in the world has some degree of risk. But compared to what? “No, I never wear a seatbelt — seatbelts aren’t safe enough for me.”
Treasury bonds are among the safest investments out there. However, they are more exposed to inflation risk than equities. If the interest rate goes up 1%, your bonds will lose 10% in value, so if that’s all you own you’re screwed. If however you are diversified across asset classes, a loss in the value of your bonds will ideally be balanced by a gain in the value of equities (as we’ve seen this year, when long-term Treasuries have dropped and equities have risen).
And if you actually think you should put money in a hedge fund because treasury bonds aren’t safe enough??
No, not because they aren’t safe enough — because you want to get additional return. Treasury bonds are safe, but as always the less risk, the less return. If you want more return, you have to go further out on the risk curve, which means if you’re a relatively high worth individual who can tolerate losses perhaps investing in a hedge fund.
October 23rd, 2009 at 1:42 pm
Hedge funds aren’t an asset class. They’re an intermediary that actually leaves you invested in other assets, but you don’t necessarily know which, or whether they’re correlated with your other positions, or how. And you pay significantly for this privilege.
Well, it depends. In 2005 the National Strategic Investment Dialogue asked 51 leading investment professionals whether they classified hedge fund as a separate asset class. 45%responded that they did view them as a separate, distinct asset class, in large part because they can produce returns and risks unlike those of other asset classes.
October 23rd, 2009 at 1:50 pm
The problem with the analogy is that there are no natural positions that are offset with Meriwether’s bond arbitrage strategy.
There is if his returns aren’t correlated with the returns of other asset classes. His ability to make or loose money isn’t really related to the overall performance of the stock or bond market. In such cases you stand a good chance of earning a 44% return when the market is in the tank and loosing everything when the market is booming – this can act to insulate your portfolio from volatility.
October 23rd, 2009 at 2:02 pm
The general academic consensus is that, with few exceptions that are not available to the average investor, the only way to make expected returns above the riskless rate while keeping variance as low as possible is to go long on the market — i.e. have a portfolio with a high beta.
That is totally correct but we aren’t talking about average investors we’re talking about wealthy individuals and institutions like pension funds – often these groups will be more than willing to trade some potential for long term gains in exchange for reduced volatility.
In theory, and in practice, a 100% stock portfolio that is hedged will have a lower rate of return over time than an unhedged portfolio. That is certainly true. However, over time the beta will be lower, and for many groups that is a trade well worth making.
October 23rd, 2009 at 2:37 pm
I think the main point is that whatever your stance is on “diversification”, you shouldn’t give your money to a guy with a history of running his funds into the ground.
October 23rd, 2009 at 2:48 pm
I think the main point is that whatever your stance is on “diversification”, you shouldn’t give your money to a guy with a history of running his funds into the ground.
That was well put.
October 23rd, 2009 at 2:51 pm
you shouldn’t give your money to a guy with a history of running his funds into the ground.
7-year Brazilian gov’t bonds currently pay 13.26%, 7-year Swiss gov’t bonds currently yield 2.89%. Just because someone may have screwed up in the past doesn’t mean it’s not a good investment, provided the potential returns are high enough.
October 23rd, 2009 at 3:03 pm
um, I’m the friend, most of the people here are incorrect. JWM’s long term Sharpe, including its liquidation, was about negative 0.6; unless highly inversely correlated to the rest of an investor’s portfolio, which it also wasn’t given it’s liquidation in the midst of last year, it’s a terrible investment, even if only a small allocation from an investor’s portfolio.
I should have said, literally the equivalent of levering fixed income butterflies (and other RV trades) and hoping that spreads never widen enough (or for long enough) so that you blow out your NAV triggers with your prime brokers and have to liquidate your positions, but I figured that was kind of inanely specific. Suffice it to say, the ex post returns on his funds are close enough to the economics of roulette that it seemed like a reasonable analogy.
October 23rd, 2009 at 3:12 pm
anon,
I can see why someone would invest 0.25% of their portfolio with this guy – who knows maybe this time he really did figure it out. What I can’t understand is, who is going to loan him any money?
October 23rd, 2009 at 3:13 pm
[...] Hedge fund managers are “capuchin monkeys” with a lot of paperwork. [...]
October 23rd, 2009 at 3:19 pm
I carefully avoided specifying the S&P 500 — I said an S&P index. I’m sure there’s an index that tracks companies of all sizes and nationalities, equity and private bonds, emergent and otherwise, commodities and real estate. Currencies? Isn’t that zero-sum? If so, of course you shouldn’t diversify with currencies — it’d increase your variance with no increase to expected return. Treasury bonds are separate as they are the canonical form of riskless investment. They are the only way a rational investor who is not Warren Buffet or James Simon should customize his investing — by varying the weight of his investment in treasury bonds with respect to his index fund.
Nope, that would require being stupid as well as being rich. If you want to go out on the risk curve, you lower the proportion of your portfolio in treasuries and raise the proportion in the index. Note that this includes lowering your treasury weighting below zero, which for private individuals entails borrowing money to fund the >1.0 weighting for the index. By shifting into some sort of vanity asset like a hedge fund, you may increase your expected return, but you’re also increasing your variance (risk) more than is necessary to obtain that increase in expected return.
Also, note what you said: “the less risk, the less return.” Exactly. If you could find a hedge fund that produced a better proportion of return-less-the-riskless-rate to variance, then you’ve violated the simple and correct rule you just said. Such a thing almost never exists, and when it does, there is absolutely no way for the rational investor to find it and profit. Might as well search for people dropping money out of helicopters, since that’s the basic economic equivalent.
No. That is not a “natural long” situation at all; completely disanalogous to the Apple employee scenario.
Beyond that, for such a thing to exist, you’re implying that there are almost no investors in the entire market who are as smart as you. If there were, they would already have crowded you out of that hedge fund.
If all you want is a lower beta, you can get that optimally by shifting some of your capital out of the index fund and into US Treasuries. What you were suggesting was something far more fantastical: that you could decrease your variance DISPROPORTIONATELY MORE than you decrease your expected return-over-the-riskless-rate. The academic consensus is that you can’t — almost no one can.
October 23rd, 2009 at 3:49 pm
What you were suggesting was something far more fantastical: that you could decrease your variance DISPROPORTIONATELY MORE than you decrease your expected return-over-the-riskless-rate.
I certainly didn’t intend to suggest that.
It’s about safety. Your theory that you can decrease your beta by moving from stocks to bonds is correct unless we were enter a period when both stocks and bonds would perform poorly. If you were 50% stocks and 50% bonds in 1972 you would be nearly wiped out by 1982. Yes, from 1982 to 1992 you would have recovered but that isn’t going to help you send out pension checks in 1985.
October 23rd, 2009 at 4:23 pm
Pender,
One weakness in your portfolio theory: The current scholarship hasn’t yet taken into account the current received wisdom that “black swan” events occur with far more regularity than we might have thought.
If there is one thing a hedged portfolio can do for you it’s protect you from black swan events.
October 23rd, 2009 at 4:33 pm
Yeah, well this guy managed to screw up massively twoce already, and he’s looking to make a third go of it using the exact same strategy. What the hell is the marketing for this fund going to be, “Third time’s the charm.”?
And if you want to diversify, there’s things called “Mutual Funds” that don’t charge you 2 and 20, aren’t leveraged to the hilt, and aren’t run by a tool who has managed to blow up two similar funds in the last 11 years.
October 23rd, 2009 at 4:49 pm
What the hell is the marketing for this fund going to be, “Third time’s the charm.”?
Oh, so you did see the presentation.
October 23rd, 2009 at 4:53 pm
This new fund may be relying more on smart investors than stupid ones. We just happen to be at the end of a recession, which means the risk of this strategy failing is much lower than if we were near peak.
Smart investors realize this, so Meriwether is probably counting on these people giving him the early capital to build his momentum and attract less competent investors. The smart investors will get out before the next bubble bursts, and the stupid ones will get stuck.
Basically, don’t be under the impression that this strategy isn’t making money. He’s doing it again, because it worked; because people getting into this know exactly what to expect: that a large number of stupid investors will transfer their wealth to a large number of smart investors.
October 23rd, 2009 at 5:28 pm
“literally the equivalent of putting a chip on 35 of the 36 roulette numbers and hoping for no zero/36.”
This strategy is called “Begging for a Black Swan Event.” You are increasing the likelihood that a Black Swan will fly by and crap on your head by a factor of ten to the tenth power -give or take a few digits.
October 23rd, 2009 at 5:29 pm
The problem with all these diversification arguments is that I’m not going to diversify into a bad investment strategy. I want asset classes with uncorrelated but positive returns. If an asset class has a long term expected return of -100% (as was the result with LTCM), it’s a bad investment.
October 23rd, 2009 at 5:34 pm
42
… What I can’t understand is, who is going to loan him any money?
I believe his lenders have always been paid in full. Although the LTCM ones had some nervous moments.
October 23rd, 2009 at 5:38 pm
The Roulette Wheel. Double it. Double it. Triple it. One more time. BINGO! You are out of there with fuckload of money. A White Swan Event going your way.
It’s amazing how many great poker players love Roulette. Guys that have all the math down cold just can’t help themselves. That’s why they have to grind out 35 hour sessions with the bourgeoisie on the 5/10 Hole Em tables, because once every few days they hear the Siren call of the Roulette Wheel.
October 23rd, 2009 at 8:50 pm
“I would assume it’s both. That being said every good pension fund should have some money invested in these things as a simple matter of diversification. You might say – I only want my pension fund invested in government bonds!”
Holy shit. Help help, Wallstreet indoctrination alarm. Hedge funds are completly useless for diversification purpose. They are no asset class, they are just a flashy name that usually means high fees and people speculationg arround with all types of asset classes. Any “diversification” beyond the one in the underlying assets comes from a negative sum speculation game. Negative sum “diversifcation” is completly useless, overall increasing your portfolio risk.
In general, diversification is far overestimated. At the point you got an S&P500 fund and US government bonds (US perspective), everything else is mainly games. If your “cheap” passive advisor wants to charge you 0,5% for playing arround with some DFA small caps value funds and similar thats already not worth those 0,5% anymore. He is only cheap compared to the bigger thiefs.
October 26th, 2009 at 3:30 pm
[...] “Good news for investors who like to lose all their money, ‘John Meriwether, the hedge fund manager and arbitrageur behind Long-Term Capital Management, is in the process of setting up a new hedge fund – his third.’ What’s that, you ask, didn’t his first fund lose all its money? Why, yes. And didn’t the second fund fold because it lost a ton of money? Yes, quite so. So how will this new one be different? It won’t!” – Matthew Yglesias [...]
October 28th, 2009 at 2:23 pm
[...] Matthew Yglesias: Good news for investors who like to lose all their money, “John Meriwether, the hedge fund [...]