Idiocracy and Mean Reversion

With politicians getting involved, it is no wonder people are scared of hedge funds. From AllAboutAlpha:

Politicians are – quite rightly – sensitive to “headline risk”. One such politician is New Mexico’s Teresa Zanetti. She tabled a bill in the state legislature at the end of January that would ban hedge fund investment by the $15 billion New Mexico State Investment Council (although, according to Pensions & Investments, it would have allowed the State pension plans to continue investing in hedge funds)…According to New Mexico Business Weekly, Zanetti says:

“A lot of people hitch their wagons to hedge funds to improve returns, but these can be very risky investments…We saw that last summer with the mortgage meltdown. The SIC [State Investment Council] wants to expand its investments in hedge funds, but I think that is essentially gambling with the public’s money.”

Zanetti clearly does not read World Beta – if she did she would realize the foreign listed hedge funds and FOFs returned about 10% in 2007 with 5% volatility. Maybe I should forward along the 2008 GIRY which shows that stock markets can go down. And by go down I mean by 66% in Germany, 80% in the US, and 96% in Japan.


I updated a table of returns after a series of up or down years in asset classes and stock indexes. For example, if at the beginning of 2008 the returns for 2005, 2006, and 2007 were 7%, -15%, -3% the heading would be + – -. The obvious conclusions are to remember to rebalance, and to get aggressive after a few down years in a row – preferably three (Japan 2009?). Click on the chart and it will open in a new window.