Hedge funds take 64 percent of their investors’ returns

“When Wall Street Rolls Out the Red Carpet for You, Who Pays?” (Wall Street Journal, March 8):

Edward McQuarrie, an emeritus business professor at Santa Clara University who studies long-run asset returns, recently analyzed how mutual-fund investors have fared since the 1920s. His goal was to measure their returns not in theory, but in real life.

He found that a $10,000 investment in 1926 in the index that became the S&P 500 would have grown to just under $198,000, 30 years later, with all dividends reinvested. But you couldn’t have invested directly in that index; it was only a hypothetical measure, without commissions or other costs.

In the real world, where mutual funds charged sales loads of up to 8.5% plus annual expenses, a $10,000 investment in 1926 would have grown to less than $99,000 over three decades. In the real world, costs ate up half the wealth you could have achieved in theory.

Over the next 30-year period, through 1986, fund investors captured only 71% of the cumulative wealth that the S&P 500 hypothetically generated.

(None of these results account for the toll of taxes and inflation.)

That last sentence is brutal. Unless you live in a tax-free environment, e.g., as an EU citizen resident in Italy, It might be better to follow Hunter Biden’s example and enjoy whatever money falls to hand rather than trying to invest!

How about the alternative investments that savvy college endowments buy into?

A recent study found that, on average, for every dollar of return they generated from 1995 through 2016, hedge funds harvested 64 cents in management and performance fees. Lately, at some leading hedge funds, expenses have even risen—to as much as 5% to 7% annually.

Of course, this analysis is presented by the same newspaper that reported on the high effectiveness of lockdowns, mask orders, and school closures as means of preventing COVID-19…

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The death of Europe: a challenge to the Efficient-Market Hypothesis religion

It is perhaps an exaggeration to say that Europe is “dying” when “stagnating” might be a fairer description. The chart below isn’t adjusted for inflation, so the European market is more or less flat in purchasing power while the investor in the U.S. market has done nicely.

All of Europe’s challenges and advantages were known to investors in 2008. Ditto for the U.S. The Efficient-Market Hypothesis, therefore, would suggest that the above situation shouldn’t have happened. Returns to the European stock market should have been about the same as returns in the U.S. market unless something dramatic occurred. Perhaps we could say that Russia’s attack on Ukraine in 2022 was an unforeseen dramatic event, but it looks as though the divergence between the markets happened well before that.

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How is Rivian doing?

Back in November 2021, I asked “What edge does Rivian have in the truck or EV market?” and questioned the company’s stratospheric market cap. It has been two years. How is the company doing and how is the stock doing?

Given the calculation that working class subsidies to elite owners of EVs are $50,000 per vehicle (direct tax credits, higher costs for gas-powered cars due to EV percentage sales requirements, subsidized electricity), the company itself should be profitable. MotorTrend says otherwise: “Rivian Loses a Huge Amount on Every Vehicle It Sells” (October 5, 2023).

From May 2023, in the lower Manhattan neighborhood favored by elites (Chelsea):

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Profiting from the permanently temporarily settled Venezuelans

“Nothing is as permanent as a temporary government program” has been proven conclusively over the past couple of decades with migrants granted “temporary protected status” (aside from the 500,000-ish Venezuelans on whom this was bestowed by Joe Biden, there are the Haitians who won this in 2010 and are still entitled to “temporary” status).

“Yes, Immigration Hurts American Workers” (Politico 2016, by a Harvard professor) concludes that elite Americans get a $500 billion/year (pre-Biden dollars) boost in wealth from low-skill immigration. This can be due to ownership of real estate, such as apartment buildings, and stocks in companies that have a larger market due to a larger population. Elites also profit by paying lower wages, since the larger supply of workers results in a lower market-clearing wage under Econ 101.

Maybe a non-elite can profit by investing in a health care enterprise in a low-income neighborhood? Migrants who are granted temporary protected status immediately qualify for unlimited taxpayer-funded health care spending (Medicaid). Here are the Florida rules:

In Maskachusetts, a noncitizen can get taxpayer-funded health care, taxpayer-funded housing, and taxpayer-funded food (i.e., a 100-percent taxpayer-funded lifestyle) and he/she/ze/they does not run afoul of the “public charge” rule:

How about California? “For Medi-Cal [Medicaid] eligibility purposes, immigrants granted TPS are lawfully present.”

Readers: How else could a non-elite American invest so as to position him/her/zir/themself to profit from the open border?

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Why have US stocks outperformed international stocks so dramatically?

One of the mantras of an index fund investor is that you can’t predict which companies or which economies will do best. (Or at least you can’t predict better than other investors, so obviously promising stocks are already priced high to reflect that promise.) Therefore, you should try to invest in a way that mirrors the domestic economy or, if you expect to spend time in other countries, the world economy.

Let’s have a look at the Vanguard all-US fund (“Total Stock Market”) “total returns” (reflects reinvestment of dividends, but not taxes).

12.17 percent return over 10 years. After federal taxes, this is 10.1 percent, says Vanguard. They don’t estimate the effect of state income taxes, but with California at at 13.3 percent on the successful, this could fall to less than 9 percent for a Californian.

How about the Vanguard all-foreign fund (“Total International”)?

In an efficient market, the returns should have been about the same. But the investor enthusiastic about broadening his/her/zir/their investment base got destroyed. The 10-year total return on non-US stocks, in U.S. dollars, has been 4.68 percent. After federal taxes? 3.88 percent. After California state taxes? Perhaps around 3.5 percent. Foreign bonds would have paid better than foreign stocks, I think.

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How many Mega Millions lottery tickets did you buy?

Scanning the headlines, I see the Mega Millions is up to $1.55 billion. That’s a fake number because it is pre-tax and adds up an annual payment without discounting? Let’s assume that it isn’t a fake number. The odds of winning are 1 in 302 million and a ticket costs $2. So we should definitely play! We expect to get $5.13 for every ticket that we buy (ignoring any less-than-jackpot prizes).

But of course, the number is fake. CNBC says that the one-time lump sum payment is $757 million. This analysis says that the lump sum in a state such as Florida with no personal income tax is worth only $477 million after federal income tax. The odds of winning on a $2 ticket are 1 in 302 million. So I think one gets back only about $1.50 in expected value from the big jackpot. But maybe the lesser prizes are what make the expectation positive? This analysis adds up all of the lesser prizes. The expected value of a $2 ticket was only about $1.10 after taxes when the jackpot was $521 million and fell to about 77 cents for players who chose the lump sum option. On a $1.55 billion jackpot if you pick numbers that nobody else picks maybe it would be worth buying tickets? Would it make sense to use a random number generator? Use numbers that the Chinese consider unlucky? Pick the birthday of a 17th century scientist whom nobody cares about?

Who has purchased some tickets for what could now be a rational activity, depending on your level of risk aversion? What are you planning to buy if you win?

(I would use my winnings to buy housing for every currently unhoused resident of the U.S., to pay for immigration lawyers to help migrants prevail in the 10-year asylum process, to finance Democrats running for office (stepping in where Sam Bankman-Fried of FTX has withdrawn), etc. With any leftover money, beyond the obvious aviation items, how about a bus-based RV (about $3 million fully pimped-out). And, of course, a driver. I’d be able to watch Barbie and Oppenheimer over and over while sitting in traffic. And would have a nice place to sleep at Oshkosh!)

Separately, and speaking of Sam Bankman-Fried and crypto glory, how about this Bitcoin criminal who stole $4.5 billion? That’s way more than Mega Millions and he just hung around in New York City for years until he was arrested. From the WSJ:

If you get a lottery-style windfall, but it is illegal, wouldn’t it make sense to move to some country where they won’t extradite?


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How is First Republic Bank different from Silicon Valley Bank?

Readers: Please help me keep these bank failures straight. “First Republic Stock Plunges After Bank Rescue Plan, Dividend Suspension” (WSJ, today):

First Republic Bank shares fell more than 30% Friday after a multibillion-dollar rescue deal orchestrated by the biggest U.S. banks failed to convince investors that the troubled lender is on solid footing.

The move erased the gains that came Thursday, when a group of banks including JPMorgan Chase & Co., Citigroup Inc., Bank of America Corp. and Wells Fargo & Co. deposited $30 billion in First Republic in an effort to restore confidence in a banking system badly battered by a pair of bank failures.

“It’s not clear whether it’s viable as a stand-alone entity,” said Julian Wellesley, global banks analyst at Boston-based Loomis Sayles & Co. “So it’s likely, in my view, to be taken over.”

The sudden collapse recently of Silicon Valley Bank and Signature Bank—the second- and third-largest bank failures in U.S. history, respectively—have sparked concerns that anxious customers could drain deposits from other small and midsize banks.

What do SVB and First Republic have in common other than both being supervised/regulated by the San Francisco Fed? Was First Republic as devoted to diversity and inclusion as SVB?

As Congress and the D.C. Fed flooded the U.S. with money in 2020, what was First Republic thinking about? “First Republic Expands Commitment To Diversity, Equity and Inclusion” (August 31, 2020):

First Republic has engaged Management Leadership for Tomorrow (“MLT”), a national nonprofit that equips and emboldens high-achieving Black, Latinx and Native American individuals to secure high-trajectory jobs, while partnering with employers to provide access to a new generation of diverse leaders. The organization’s advisory services help institutions to better foster an environment of success for the underrepresented colleague experience.

“A diversity of backgrounds, opinions and perspectives has always been fundamental to our success,” said Jim Herbert, Founder, Chairman, and CEO of First Republic. “Management Leadership for Tomorrow has a proven track record of success in helping companies find and develop leaders from underrepresented communities.”

Individuals who self-identify as members of ethnic minority groups currently total 48% of First Republic’s workforce, with over 55 languages spoken at the company. Building upon First Republic’s long-standing culture of inclusion and diversity, MLT will provide strategic and tactical support to help further diversify the company’s workforce. In addition, the organization will collaborate with First Republic to enhance colleague and culture development programs that drive a sense of belonging and engagement.

If we count employees identifying as “women” as being in a victimhood class and we consider these 48% who were victims via “ethnic minority group” identification, the majority of the bank’s employees were victims and yet the goal was apparently to go bigger in the victimhood department. Here’s the person who was CEO for 37 years, through 2022:

James Herbert was replaced, in the CEO/COO roles, by a diverse duo:

But what exactly did these diverse executives do to cause the meltdown? And why didn’t the San Francisco Fed notice anything amiss? Let’s check a 2018 New York Times article:

The Federal Reserve Bank of San Francisco has installed Mary C. Daly, a labor economist who currently serves as the head of research, as the institution’s new president beginning Oct. 1. … Ms. Daly, who is openly gay, will become the third woman among the 12 presidents of the Fed’s regional banks. As a senior executive at the San Francisco Fed, she has been a leading voice for addressing what she has described as a “diversity crisis” in the economics profession and at the Federal Reserve. At the San Francisco Fed, she pushed successfully to balance the hiring of male and female research assistants.

Dr. Daly attacked the diversity crisis at the San Francisco Fed, but ignored the insolvency crises brewing at SVB and First Republic? If diverse teams are smarter and more capable and the San Francisco Fed had more diversity than other regional Federal Reserve Banks, why are two of the biggest failures in the SF Fed’s territory?


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The wisdom of juries at the Elon Musk trial

A lot of folks, including journalists, love to concoct ex post facto explanations for why the stock market moved as it did on a particular day. The Elon Musk trial has introduced us to a guy who sounds a lot smarter than most pundits and financial reporters. “Jury Rules for Elon Musk and Tesla in Investor Lawsuit Over Tweets” (NYT):

The federal judge in the case, Edward M. Chen, had already ruled that “funding secured” and Mr. Musk’s second statement were untrue, and that Mr. Musk was reckless when posting them.

“I thought he was crazy to try his chances at trial, given the stakes involved,” said Adam C. Pritchard, a law professor at the University of Michigan, noting the judge’s pretrial rulings. “You’re fighting with one hand behind your back in that situation — and yet he won.”

If he had lost, Mr. Musk and Tesla might have had to pay billions of dollars in damages to investors who said they had lost money when the company’s stock surged after his statements on Twitter and then tumbled after his plan fizzled.

One male juror said their arguments were difficult to follow and sometimes seemed disorganized. “There was nothing there to give me an ‘aha’ moment,” he said, later adding, “Elon Musk is a guy who could sneeze and the stock market could react.”

Let’s check in with the superpundits to see how they did compared to this juror. Dow 36,000 was published in October 1999 when the DJIA was at 10,000. The D.C. insiders authors predicted that the DJIA would be at 36,000 no later than 2004. They were proved correct… in November 2021.

Of course, inflation makes every feel smarter. Despite the higher nominal value (3.4X what it was when Dow 36,000 was published), a basket of DJIA stocks has less purchasing power, in terms of real estate in any part of the U.S. where people actually want to live, than it did in 1999. Let’s check Zillow for some houses in our MacArthur Foundation-created development:

  • overlooking a golf course: sold in February 2000 (before the dotcom crash) for $483,900 and now has an estimated value of $2.04 million (4.2X)
  • a simple townhouse: sold in October 1999 for $192,900 and now estimated at $621,500 (3.2X)

Inflation has actually been far worse than the above examples suggest since, of course, these houses are now more 20 years old and aren’t in the pristine condition that they were when new.

How about Jupiter Inlet Colony, where some migrants recently arrived?

(should be easy to find room for non-English-speaking migrants in the Jupiter Inlet Colony, described in this New York Post article!)

Let’s check in with the intersection of Efficient Market Hypothesis and coronapanic:

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The Lost Bank lesson: Make sure you have a lot of friends in Washington, D.C.

I hope that each of you did his/her/zir/their reading assignment from a month ago, i.e., The Lost Bank: The Story of Washington Mutual – The Biggest Bank Failure in American History.

Now that I have finished the book myself and have given folks a chance to avoid spoilers, a brief post about the end of the book.

It turns out that it wasn’t clear that WaMu had actually failed. Even when it was seized by the FDIC, wiping out shareholders and bondholders, and then sold for almost nothing to politically connected and savvy JPMorgan Chase, the bank may well have had sufficient liquidity under Federal rules. A quiet bank run, in which billions of dollars left WaMu daily, was precipitated by the following factors: (1) leaks from Washington, D.C., (2) the FDIC insurance limit of $100,000 per depositor (almost enough to buy a car today!), (3) consumer ignorance regarding the practicalities of FDIC insurance, (4) consumer reluctance to become embroiled in a process of getting money from the FDIC. If not for the leaks about the regulators’ concerns, the bank run probably wouldn’t have happened and the regulators wouldn’t have been able to seize WaMu’s assets.

We may never know the answer to whether the bank actually met the relevant criteria for being shut down. Kirsten Grind, the Wall Street Journal reporter who wrote the book, gives various estimates for the bank’s liquidity on the day of shutdown but is unable to say which one is correct.

Why is it that 5 banks enjoy roughly half of U.S. commercial bank assets?

Partly this is due to the reasons discussed in the previous post regarding this book. But it is also due to the fact that the government treated some of the biggest New York banks differently than WaMu, only slightly smaller. The NY banks, donors to Senator Charles Schumer, had similar liquidity issues to what WaMu suffered. But they were deemed “systemic risks” a.k.a. “too big to fail” and, therefore, were showered with government money (taxed, borrowed, or printed) that was denied to WaMu. A handful of political appointees and government workers at the Fed, the US Treasury, the FDIC, and the OTS had a tremendous amount of discretion regarding which banks would get bigger and which would be seized.

So in addition to the topics mentioned in my previous post, the book serves as a good example of the importance of lobbying and political donations!


  • “A Champion of Wall Street Reaps Benefits” (NYT, 12/13/2008): Senator Schumer plays an unrivaled role in Washington as beneficiary, advocate and overseer of an industry that is his hometown’s most important business. Mr. Schumer led the Democratic Senatorial Campaign Committee for the last four years, raising a record $240 million while increasing donations from Wall Street by 50 percent. That money helped the Democrats gain power in Congress, elevated Mr. Schumer’s standing in his party and increased the industry’s clout in the capital. Calling himself “an almost obsessive defender of New York jobs,” Mr. Schumer has often talked of the need to avoid excessive regulation of an industry that is increasingly threatened by global competition.
  • Is LGBTQIA the most popular social justice cause because it does not require giving money? (includes photos of Seattle from August 2019, including one in which the truth of the Rainbow Flag religion is proven mathematically)
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