Published by Bob Elliott on May 31, 2022 3:43:55 PM
Low cost index funds yield better returns than a portfolio of high cost managers.
What was seen 50 years ago as “Bogle’s folly” is now mainstream thought for many investors when it comes to stocks and bonds. Today sophisticated investors are still trying to pick hedge funds. The best are getting worse results than an index replication with a lot of extra work. Most are lining the pockets of hedge fund managers at clients’ expense.
At Unlimited we have developed technology that can be used to create low cost, liquid replications of hedge fund returns using machine learning technology. Like all replications it’s imperfect, but it’s also inexpensive which creates “fee alpha” just like Bogle’s equity or bond index funds did years ago.
The approach is better than investing in hedge fund LP positions. Even when the best managers are careful to select only top funds they trail the performance of an index replication because improved selection doesn’t make up for the fee alpha.
The table below compares Unlimited’s simulated index replication (with a 95bps fee) to the subsequent performance of 10 fund portfolios of top 10% performing managers as of 5 years ago. The Unlimited simulated replication would have outperformed the vast majority of possible combinations of previously top performing hedge fund investments.
The gap is even bigger if all possible fund investments are included. This is more reflective of a typical investor experience.
The table below compares the outcomes of holding Unlimited’s simulated index replication (with a 95bps fee) to investing in a randomly selected set of 10 hedge funds over the same period. During the last 5 years the simulated replication would have delivered nearly 500bps better returns on average and outperformed 95%+ of all possible 10 fund portfolios.
Bogle’s folly decades ago eventually created the second largest asset manager in the world and saved investors trillions on their stock and bond investments. At Unlimited we believe the combination of our expertise and proprietary technology can do the same for high cost 2/20 products. We are starting by repeating Bogle’s folly with hedge funds and over time with other 2/20 products. The potential is to save investors 100s of billions in fees without sacrificing quality returns.
The returns shown are for illustrative purposes only and do not represent the composition of any portfolio or account managed by Unlimited and available for investment by others. Simulated, backtested, modeled, or hypothetical performance results have certain inherent limitations and are for illustrative purposes only. Such results are hypothetical and do not represent actual trading, and thus may not reflect material economic and market factors, such as liquidity constraints, that may have had an impact on actual decision-making. Such results are also achieved through retroactive application of a model designed with the benefit of hindsight and cannot account for all financial risk that may affect actual performance. No representation is being made that any investor will or is likely to achieve results similar to those shown.