by Doug Friedenberg
We had the pleasure of attending a Bloomberg Portfolio Manager Mash-up, as they call it, several weeks ago. As we would call it, we attended a fireside chat with John Bogle, eminence grise and founder of the Vanguard Group, nestled in amongst reports of the view inside probably two dozen crystal balls owned and interpreted by proficient high-profile portfolio managers, with varying and sometimes contradictory views. Mr. Bogle stood out for his lack of both a crystal ball and the need to have one in the first place.
Before continuing, a warning: trader types, HFT or otherwise, may be irritated by John Bogle’s comments. The question is whether it’s the irritation of pigs when someone gets in between them and their swill, or the irritation which, in an oyster, leads to a pearl.
As a point of interest, John Bogle described himself as a lifelong Republican of the Lincoln or Teddy Roosevelt type. That may not suit today’s purified Republicans, as it would require a knowledge of history.
Mr. Bogle is one of those annoying people in possession of both relevant facts and an unwelcome conclusion derived from same. The problem with John Bogle, frankly, is that, as father of indexing, he has rather an eloquent view on its virtues, and some experience to back it up. To sum up, You who are struggling to outperform the wave motion of the financial markets (which would be most of you, we expect) will not find your day brightened by one of the more venerated gents on Wall Street implying that you might be more productive picking fruit in Alabama now that illegal immigrants are now longer allowed to.
At minimum, the criticism, which comes from quite a few sources these days, will assist the hedge fund industry to turn up its competitive capabilities. Or if it can’t do that, it can certainly afford marketers and lobbyists to gloss over the details.
Hedge Fund Mediocrity and the Carried Interest Question
John Bogle fired several broadsides into the hedge fund world. He noted the proliferation of ETF’s, which make it easier to trade into and out of indices, industry groups, countries and currencies. There seem to be almost as many ETF’s now as there are stocks. He noted that all of this stimulates more trading, which, in turn, generates a substantial amount of friction. He felt that the substantial frictional costs also serve to diminish returns.
John Bogle’s observation was that the trading mentality was rather closer to simple gambling, which led him to wonder: why should Wall Street gamblers be taxed at a rate well below that of the lower paid workers who are necessary to a functioning economy? He opined that the carried interest exception was a “technical fraud,” pointing out that a very small percentage of the $40 trillion in market trading was actually directed toward capital raising.
The Bloomberg interviewer seemed rather surprised by these comments, as if the notion had never occurred to her. She inquired what Mr Bogle thought of the hedge fund industry. He noted that early on, academics had blessed the industry to a point, but that he himself was cynical, saying that Wellington had averaged a 9% return versus a hedge index at 8 % over a number of years.
The interviewer asked why John Bogle thought the hedge fund industry was so popular. His take was that it was a combination of greed and hope on the part of investors. He did note that Lee Ainslie of Maverick and Cliff Asness of AQR are hedge fund managers for whom he has a great respect.
Rishab Ghosh of Topsy
Some readers will have seen our recent piece about Topsy and Twitter, wherein we suggested that Topsy is to social media such as Twitter what Google is to the millions of websites now cluttering cyberspace. Rishab was given the princely sum of ten minutes at the conference to acquaint the audience with Topsy developments and its relevance to people who want to know what will happen next right before it happens. Rishab’s comments were similar to those upon which we reported, but we did observe one brief striking moment. When Rishab had concluded, the Bloomberg moderator asked for a show of hands as to how many in the audience would incorporate social media analysis in their portfolio decisions. We counted maybe three or four hands raised out of 150 in the room. It was striking that so few portfolio managers responded in the affirmative. Whether it was because they hadn’t totally understood or listened to the presentation, or because they had thought about it and reached a conclusion, we couldn’t say. But it wouldn’t surprise us if the lack of response is in some way related to the hedge fund underperformance crisis. Alpha generation, by definition, requires leaving the safety of the herd. Which is why it’s so difficult.