Hi,
Georoge Soros, Stanley Druckenmiller, David Tepper, Bruce Kovner.. the list may get stretched if one fine comb the internet patiently.... however, The pattern is that none of them are value investors! Seth Klarman, one of the icon of value investing, started Baupost in 1982, and so far return has been barely 20%, Warren Buffett's return has also decreased, overall, the world's proclaimed greatest investor has a return of less than 25% a year. David Einhorn doesn't generate 30% a year, nor am I aware of any other value investor with a 2 decade track record of 30%. don't even start on Ackman...
The ones that do have track record of 30% per year are global macro guys, does this mean global macro is a superior method of investing? I would think so based on these numbers, wonder what others have to say about this.
You are aware that "investing" is about more than just the returns, right?
enlighten me.
Like Kenny_Powers mentioned, it's risk that matters, as well as the returns. Macro funds, speaking overly generally, are characterized by relatively higher volatility. Then, of course, there's always the pesky issue of survivorship bias.
Generally, macro undoubtedly has advantages as a strategy, but it ain't a silver bullet by any means.
Are you referring to the potential for higher absolute returns and non-correlation to traditional indices? Are there any other advantages?
BTW, anyone know any books that teaches how to invest top down? Bottom up value guys have Securities Analysis, what does top down guys have?
Tommorrow's Gold: Asia's Age of Discovery by Marc Faber is really good in my opinion. I also liked the Market Wizard Series and Alchemy of Finance.
I'm not trying to self promote, but I did a post a while ago that I listed a bunch of my favorite books, resources, etc. Might help you out a little.
http://www.wallstreetoasis.com/forums/on-the-job-with-simple-as%E2%80%A…
I was thinking more of liquidity and scalability. As a rule (again, I'm generalizing liberally here), macro strategies rely on mkts where instruments are relatively simple and liquidity is not an issue, even for v large participants. For a specific example, consider the story about Bridgewater selling $40bn treasuries and TIPS in June this year.
Well, since these superstar global macro managers are "consistently" making the good returns, I would have to assume that they are dodging these risks, though they may not show in numbers when you calculate the risk adjusted returns.
There's only one way to consistently get returns that high: leverage.
Also, returns were historically a lot higher, partially due to higher interest rates.
Tepper self-identifies as value though I'll grant Appaloosa has a bit more of a tendency to macro-driven calls than some.
Not sure where you're getting your return figures. Quantum is often said to have returned >30%/yr while Soros was the PM, but that run ended a LONG time ago and both he and Druckenmiller stepped down in their turns in part because of returns not meeting (their own) expectations. When Soros returned outside capital the annual return was described as avg of 20%/yr and was coming off of weak returns in 2010 and 2011 YTD. You also conveniently ignore some macro legends whose returns don't meet your undocumented, self-created cut-off, such as Louis Bacon, Paul Tudor Jones, and Ray Dalio.
One last thing-as Martinghoul points out, risk-adjusted returns matter. Leverage, both on a portfolio level and on an embedded level within derivatives (common to macro funds) lead to higher risk of implosion than value-oriented strategies (take for example LTCM or anything else associated with John Meriweather).
Interesting comments guys. Macro funds are more volatile, due to leverage. One way I think Equity long-short bottom up guys can leverage themselves is buying deep in the money calls and puts.
And speaking Tepper, I am fascinated with this guy, not sure what volatility Appaloosa has, but 30% a year in this day and age is impressive.
Kenny, he does come off as a top-down guy based what I glean from his Bloomberg interviews. Does anyone understand the process Appaloosa go through to pick investments? How much time would the fund spend on uncovering macro trends Vs. digging into the financials of individual companies and trying to discovery value?
I can't speak for Tepper / Appaloosa, but generally people use a top-down approach to determine what sectors/industries/geographies are likely to outperform the market given the macro environment / trend and then use bottom up analysis to determine which individual securities to invest in within the chosen sector/industry/geography.
"Can" vs. "Do" is the operative difference here. Some may, but as a rule the big value names you've mentioned don't. Equity funds CAN use portfolio (margin) leverage as well. Some very successful multi-manager funds (like Millennium for example) require managers to be 100% (or nearly 100%) hedged, so the actual equity at risk per manager is limited and alpha is isolated. They then take a bunch of market-neutral long/short equity books, which all sum up to a comparatively small amount of equity at risk, and lever it up. Again, this is distinct from the typical value fund which tends to be net-long and have alpha-generating shorts rather than a market-neutral mandate.
I can't speak to the day-to-day at Appaloosa, but many of their positions (especially their traditional distressed wheelhouse) are certainly company-specific. One recent interview he distinguished between "trades"-for example the airlines where he felt like there were tailwinds (heh) for the sector- and "investments" where there is a fundamentally-driven thesis behind feeling the company is undervalued.
LMAO at OP acting like averaging 20% annual returns over 20+ years is somehow mediocre. Hell, just staying in the game that long is an accomplishment in and of itself. And to add to what KP and Martinghoul mentioned, you also have to take in to account how phenomenal these returns are given the ridiculous amounts of money these guys manage. Getting returns like these guys have on 10,15 or 20+ billion is stupid good.
As long as Klarman stays with no leverage and 30-50% cash, his returns will always lag in comparison to the macro guys you mentioned.
good point. was not aware that Klarman has that much in cash. But then again, I would guess that most of these global macro guys who are trading in the futures market has a Margin to equity ratio that is lower than 30%, the rest of 70% in cash.
Of the first four names the OP listed, three are not even in the business of managing external capital anymore. I will always be a fan of macro trading as that is somewhat the space I work in, but macro PMs were largely destroyed over the last three years. Fortunately that is starting to change with the higher global rates, JPY death formation on the charts, and EM FX getting selectively smacked in the last 6-12 months. As for the anecdotal evidence regarding returns, that is all a waste of time and honestly most fund managers in any management style are going to leave you worse off than buying cash RTY and sitting on your hands.
any chance you work in the FX space?
That is simply not true, as a along time investor with Tepper going back to 1993 and an investor in both the Palomino and Thoroughbred fund, he is very much in the business of running outside money. Granted he averages 33% a year net of fees so he basically gives back his investors 10-20% of their capital a year. Not sure where in the world you heard that.He has not taken money in ages and I doubt he will ever take money every again.
That is simply not true, as a along time investor with Tepper going back to 1993 and an investor in both the Palomino and Thoroughbred fund, he is very much in the business of running outside money. Granted he averages 33% a year net of fees so he basically gives back his investors 10-20% of their capital a year. Not sure where in the world you heard that.He has not taken money in ages and I doubt he will ever take money every again.
That is simply not true, as a along time investor with Tepper going back to 1993 and an investor in both the Palomino and Thoroughbred fund, he is very much in the business of running outside money. Granted he averages 33% a year net of fees so he basically gives back his investors 10-20% of their capital a year. Not sure where in the world you heard that.He has not taken money in ages and I doubt he will ever take money every again.
That is simply not true, as a along time investor with Tepper going back to 1993 and an investor in both the Palomino and Thoroughbred fund, he is very much in the business of running outside money. Granted he averages 33% a year net of fees so he basically gives back his investors 10-20% of their capital a year. Not sure where in the world you heard that.He has not taken money in ages and I doubt he will ever take money every again.
The more recent HSBC reports have been taken down on Zero Hedge due to copyright issues but here is one from July that is still up:
http://www.zerohedge.com/news/2013-07-11/complete-2013-year-date-hedge-…
Tepper's Palomino fund has done 26.8% annualized since 1994 (probably slightly better now) Candlewood Special Situations Fund has done 22% annualized since 2003 Passport Global 18.6% since 2000 Nevsky Fund 20.9% since 2000 Marlin Fund 28% since 1996 (26% annualized std dev and 60% max drawdown, somebody likes to swing for the fences) Greenlight Offshore 17.9% since 1996 (probably slightly better now. std dev 10.9%, max drawdown 27.2%) Third Point 17.8% since 1996, Third Point Ultra 27.1% Moore Global 18.5% since 1989 (1989! thats a long time managing money) Tudor 19.83% since 1986 (max drawdown of 17% in 1992... actually puts the hedge in hedge fund. 200% in 1987 probably helped a bit)
Bottomline, if you can compound large sums of money at anything close to 20% annually you have a decent shot at being a billionaire. The retarded 40%+ returns that get thrown out there are really only available in the long run to those who are willing to stay small, give away outside capital, and give away large chunks of their own money every year.
finally, people love to shit on him now but Paulson Credit Opportunities: 47.7% annualized since 2006.
The crazy thing is, for dedicated credit funds POST crisis ('09-present) that wouldn't be unheard of, but to do it from 2006 to present is one of the all-time great performances.
26% stdev and 60% max drawdown - Marlin is a G
Does Paulson do any HFT or quant stuff?
Not that I've ever heard of. Legacy was classic risk-arb/merger-arb with some other event strategies; got into more general value/event-driven stuff during/after the crisis and added some macro calls (ie the gold fund). It's been interesting to see how some of the traditional value guys (Einhorn etc) have become "macro tourists" (to use a phrase I can't claim to have invented) post-crisis. Tepper with the Euro (which he claims was his first currency trade), lots of examples with gold, etc.
One thing worth noting is that anyone who does structured credit stuff in a big way probably has some people who read as more "quanty." Doing things like the Paulson/Abacus trade warrants having someone with at least some familiarity with correlation modeling etc in order to speak the language with the trading desks.
"You are not going to make money talking about risk adjusted returns and diversification. You've got identify the big opportunities and go for them"
-Stan Druckenmiller
But then again, what does stanley know about investing anyways?
Well, this is a rather poor comment from Stanley... At the very least, these days you have to be talking risk-adjusted returns and diversification because that's how your investors talk (maybe not his investors, but we can't all be like Stan). And you'd better be talking the same language as your investors.
Druckenmiller has one investor. I'll give you a hint, his name rhymes with Duckenmiller
how exactly can I figure out one's risk adjusted returns? Can you give me an a priori way of doing it?
I agree in part that managers may be incentivized to seek risk adjusted return because its in the mind of the investor. but I think the focus on risk-adjusted return has been over-emphasized since its inception. The way I see it, risk adjusted return only matters to a point. and part of risk adjusted return is in minimizing downside volatility, and the reason to minimize downside volatility is two fold, first reduce the risk of ruin, second, so investor's don't read their NAV and feel like they are sitting on a rollercoaster and as a result, shit themselves.
Nowadays, I feel lots of market participant are so unconsciously focused on risk-adjusted returns that they are sacrificing absolute return. I think this is false and sub-optimal, there comes to a point where risk of ruin is so small that to sacrifice any additional returns for any decrease of volatility is just not worth it. there comes a point, where marginal benefit of decreasing volatility is lower than the marginal cost of absolute return. But alot of people are all about the ratio. (Sortino, sharp, Treynor, Jensen, etc)
From 1969 - 2001, Soros's CAGR is 33.1% net of fee, while buffet compounded 26% net of fees from 1958 - 2001. if you had invested $1,000 with Soros in 1969, by 2001, you would have $12,527,829. if you had invested in the same amount in Buffett for the same period, you would have $2,052,239. Who would you invest in? Do you really care if Warren Buffett had a Sharp of 1.47 while Soros had lower Risk-adjusted return with a sharp of 1.31? (all these real stats are taken from a book I am reading right now, "absolute returns" by Alexander M Ineichen)
I wouldn't, and this is what I mean, by risk-adjusted after a certain point shouldn't matter that much when you are considering lots of absolute return gained and lost in the long run.
You're taking the quote way out of context.
If you're trying to compare money managers across very different asset classes and strategies risk adjusted returns is probably the least shitty way to do so.
Stan was talking about his personal view on portfolio construction -- a few concentrated, high conviction ideas rather than a multitude of smaller, inherently lower conviction ideas. This has been his investing style since he was at Pittsburgh National Bank. It makes sense that he would promote this style because he personally employs it and has been ridiculously successful in doing so.
His main issue he was getting at in the interview is the continually lower returns hedge fund managers are putting up these days in the name risk adjusted returns. He made the comment that he and the other successful managers of his era (Soros, Tudor, etc) were expected to return 20% a year to investors and that that expectation justified the 2/20 fee he charged to manage money. He makes the assertion that today investors are still paying 2/20 and not expecting returns that are commensurate with that type of compensation for managers. I have a hard time disagreeing with him, personally.
Basically, from what I can tell, Stan is saying that if an investor is going to pay a manager 2/20 to manage money the manager had better do what is necessary to provide returns that make the fees worthwhile for the investor.
But, like I said above, if you're trying to compare the returns of a global macro guy like Stan to a guy like Tepper who mostly deals in distressed and equities than risk adjusted returns is as good a metric as any.
fair enough.
Now how do we adjust returns for risk?
My point is that with whatever method you use it probably says very little. because the market is constantly changing.
Chances are if you have returned 30% a year for 30 years then whatever your risk adjusted returns are, do not mean much. the only way thats possible is either 1) you know how to manage risk in your portfolio 2) you got lucky. And I'd say its probably the first one.
Lets say two guys start off with a billion dollars and thirty years later one guy averages 30%, and the other guy averages 15%. I dont care whether one guy is trading stocks and not diversifying and the other guy is trading bonds, or whatever. I would go with the 30% guy, regardless of their risk adjusted returns. chances are that you knwo what your are doing after 30 years of 30% years.
Yes, of course, everything needs to be done in moderation. All considerations of "risk-adjusted returns" need to be tempered with an understanding of the drawbacks of the methodology, the liquidity characteristics of the portfolio, etc etc etc. There is never a silver bullet and the one right answer. Fixating on a single number doesn't really help.
My point is that, as an investor, I have no way of knowing a priori if the guy managing my money the Druckenmiller way (i.e. highly concentrated, specific bets) is, in fact, a Soros or a Druckenmiller. That is why I would look at all sorts of metrics like Sharpe etc.
EDIT: I might have linked to this before, but this is an excellent summation: http://markdow.tumblr.com/post/29342504820/why-are-global-macro-hedge-f…
how will those metrics tell you if he is a soros or a druckenmiller?
Im saying disregard those metrics in favor of long term average annual performance.
the risk metrics and ratios are all empirical,and when the market changes, they mean very little. However if you've been around for 20+ years and are consistently making money, chances are you are good at managing risk, and risk adjusted return ratios are largely meaningless.
You'd probably care about more than just annualized returns when you try to make a redemption in the middle of a drawdown.
These metrics sure as hell won't... However, I am of the view that a reasonable investor shouldn't be out there trying to look for the next home run, a la Soros or Druckenmiller. And it's all fine and dandy to say that long term average annual performance trumps everything, but what if you don't have the luxury of having access to such a lengthy time series of returns? Moreover, as we all know and not to repeat the ole platitude, glorious past performance doesn't always mean the same for the future.
The logic behind of all these metrics is exactly the same as the logic behind doing analysis on a trade. Supposing you have a variety of opportunities to choose from, wouldn't you generally want to have a conceptual framework to actually figure out which one of them is best? And, obviously, like I said previously, all such frameworks come with caveats and offer just one particular signal. I would certainly not suggest treating this signal as gospel, but it's something, innit?
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