Wednesday, February 26, 2014

Preview:Buffett's annual letter: What you can learn from my real estate investments

"Investment is most intelligent when it is most businesslike." --Benjamin Graham, The Intelligent Investor

It is fitting to have a Ben Graham quote open this essay because I owe so much of what I know about investing to him. I will talk more about Ben a bit later, and I will even sooner talk about common stocks. But let me first tell you about two small nonstock investments that I made long ago. Though neither changed my net worth by much, they are instructive.
This tale begins in Nebraska. From 1973 to 1981, the Midwest experienced an explosion in farm prices, caused by a widespread belief that runaway inflation was coming and fueled by the lending policies of small rural banks. Then the bubble burst, bringing price declines of 50% or more that devastated both leveraged farmers and their lenders. Five times as many Iowa and Nebraska banks failed in that bubble's aftermath as in our recent Great Recession.
In 1986, I purchased a 400-acre farm, located 50 miles north of Omaha, from the FDIC. It cost me $280,000, considerably less than what a failed bank had lent against the farm a few years earlier. I knew nothing about operating a farm. But I have a son who loves farming, and I learned from him both how many bushels of corn and soybeans the farm would produce and what the operating expenses would be. From these estimates, I calculated the normalized return from the farm to then be about 10%. I also thought it was likely that productivity would improve over time and that crop prices would move higher as well. Both expectations proved out.
I needed no unusual knowledge or intelligence to conclude that the investment had no downside and potentially had substantial upside. There would, of course, be the occasional bad crop, and prices would sometimes disappoint. But so what? There would be some unusually good years as well, and I would never be under any pressure to sell the property. Now, 28 years later, the farm has tripled its earnings and is worth five times or more what I paid. I still know nothing about farming and recently made just my second visit to the farm.
In 1993, I made another small investment. Larry Silverstein, Salomon's landlord when I was the company's CEO, told me about a New York retail property adjacent to New York University that the Resolution Trust Corp. was selling. Again, a bubble had popped -- this one involving commercial real estate -- and the RTC had been created to dispose of the assets of failed savings institutions whose optimistic lending practices had fueled the folly.
Here, too, the analysis was simple. As had been the case with the farm, the unleveraged current yield from the property was about 10%. But the property had been undermanaged by the RTC, and its income would increase when several vacant stores were leased. Even more important, the largest tenant -- who occupied around 20% of the project's space -- was paying rent of about $5 per foot, whereas other tenants averaged $70. The expiration of this bargain lease in nine years was certain to provide a major boost to earnings. The property's location was also superb: NYU wasn't going anywhere.
I joined a small group -- including Larry and my friend Fred Rose -- in purchasing the building. Fred was an experienced, high-grade real estate investor who, with his family, would manage the property. And manage it they did. As old leases expired, earnings tripled. Annual distributions now exceed 35% of our initial equity investment. Moreover, our original mortgage was refinanced in 1996 and again in 1999, moves that allowed several special distributions totaling more than 150% of what we had invested. I've yet to view the property.
Income from both the farm and the NYU real estate will probably increase in decades to come. Though the gains won't be dramatic, the two investments will be solid and satisfactory holdings for my lifetime and, subsequently, for my children and grandchildren.
I tell these tales to illustrate certain fundamentals of investing:
  • You don't need to be an expert in order to achieve satisfactory investment returns. But if you aren't, you must recognize your limitations and follow a course certain to work reasonably well. Keep things simple and don't swing for the fences. When promised quick profits, respond with a quick "no."
  • Focus on the future productivity of the asset you are considering. If you don't feel comfortable making a rough estimate of the asset's future earnings, just forget it and move on. No one has the ability to evaluate every investment possibility. But omniscience isn't necessary; you only need to understand the actions you undertake.
  • If you instead focus on the prospective price change of a contemplated purchase, you are speculating. There is nothing improper about that. I know, however, that I am unable to speculate successfully, and I am skeptical of those who claim sustained success at doing so. Half of all coin-flippers will win their first toss; none of those winners has an expectation of profit if he continues to play the game. And the fact that a given asset has appreciated in the recent past is never a reason to buy it.
  • With my two small investments, I thought only of what the properties would produce and cared not at all about their daily valuations. Games are won by players who focus on the playing field -- not by those whose eyes are glued to the scoreboard. If you can enjoy Saturdays and Sundays without looking at stock prices, give it a try on weekdays.
  • Forming macro opinions or listening to the macro or market predictions of others is a waste of time. Indeed, it is dangerous because it may blur your vision of the facts that are truly important. (When I hear TV commentators glibly opine on what the market will do next, I am reminded of Mickey Mantle's scathing comment: "You don't know how easy this game is until you get into that broadcasting booth.")
My two purchases were made in 1986 and 1993. What the economy, interest rates, or the stock market might do in the years immediately following -- 1987 and 1994 -- was of no importance to me in determining the success of those investments. I can't remember what the headlines or pundits were saying at the time. Whatever the chatter, corn would keep growing in Nebraska and students would flock to NYU.
There is one major difference between my two small investments and an investment in stocks. Stocks provide you minute-to-minute valuations for your holdings, whereas I have yet to see a quotation for either my farm or the New York real estate.
It should be an enormous advantage for investors in stocks to have those wildly fluctuating valuations placed on their holdings -- and for some investors, it is. After all, if a moody fellow with a farm bordering my property yelled out a price every day to me at which he would either buy my farm or sell me his -- and those prices varied widely over short periods of time depending on his mental state -- how in the world could I be other than benefited by his erratic behavior? If his daily shout-out was ridiculously low, and I had some spare cash, I would buy his farm. If the number he yelled was absurdly high, I could either sell to him or just go on farming.
Owners of stocks, however, too often let the capricious and irrational behavior of their fellow owners cause them to behave irrationally as well. Because there is so much chatter about markets, the economy, interest rates, price behavior of stocks, etc., some investors believe it is important to listen to pundits -- and, worse yet, important to consider acting upon their comments.
Those people who can sit quietly for decades when they own a farm or apartment house too often become frenetic when they are exposed to a stream of stock quotations and accompanying commentators delivering an implied message of "Don't just sit there -- do something." For these investors, liquidity is transformed from the unqualified benefit it should be to a curse.

A "flash crash" or some other extreme market fluctuation can't hurt an investor any more than an erratic and mouthy neighbor can hurt my farm investment. Indeed, tumbling markets can be helpful to the true investor if he has cash available when prices get far out of line with values. A climate of fear is your friend when investing; a euphoric world is your enemy.
During the extraordinary financial panic that occurred late in 2008, I never gave a thought to selling my farm or New York real estate, even though a severe recession was clearly brewing. And if I had owned 100% of a solid business with good long-term prospects, it would have been foolish for me to even consider dumping it. So why would I have sold my stocks that were small participations in wonderful businesses? True, any one of them might eventually disappoint, but as a group they were certain to do well. Could anyone really believe the earth was going to swallow up the incredible productive assets and unlimited human ingenuity existing in America?
When Charlie Munger and I buy stocks -- which we think of as small portions of businesses -- our analysis is very similar to that which we use in buying entire businesses. We first have to decide whether we can sensibly estimate an earnings range for five years out or more. If the answer is yes, we will buy the stock (or business) if it sells at a reasonable price in relation to the bottom boundary of our estimate. If, however, we lack the ability to estimate future earnings -- which is usually the case -- we simply move on to other prospects. In the 54 years we have worked together, we have never forgone an attractive purchase because of the macro or political environment, or the views of other people. In fact, these subjects never come up when we make decisions.

It's vital, however, that we recognize the perimeter of our "circle of competence" and stay well inside of it. Even then, we will make some mistakes, both with stocks and businesses. But they will not be the disasters that occur, for example, when a long-rising market induces purchases that are based on anticipated price behavior and a desire to be where the action is.
Most investors, of course, have not made the study of business prospects a priority in their lives. If wise, they will conclude that they do not know enough about specific businesses to predict their future earning power.
I have good news for these nonprofessionals: The typical investor doesn't need this skill. In aggregate, American business has done wonderfully over time and will continue to do so (though, most assuredly, in unpredictable fits and starts). In the 20th century, the Dow Jones industrial index advanced from 66 to 11,497, paying a rising stream of dividends to boot. The 21st century will witness further gains, almost certain to be substantial. The goal of the nonprofessional should not be to pick winners -- neither he nor his "helpers" can do that -- but should rather be to own a cross section of businesses that in aggregate are bound to do well. A low-cost S&P 500 index fund will achieve this goal.

That's the "what" of investing for the nonprofessional. The "when" is also important. The main danger is that the timid or beginning investor will enter the market at a time of extreme exuberance and then become disillusioned when paper losses occur. (Remember the late Barton Biggs's observation: "A bull market is like sex. It feels best just before it ends.") The antidote to that kind of mistiming is for an investor to accumulate shares over a long period and never sell when the news is bad and stocks are well off their highs. Following those rules, the "know-nothing" investor who both diversifies and keeps his costs minimal is virtually certain to get satisfactory results. Indeed, the unsophisticated investor who is realistic about his shortcomings is likely to obtain better long-term results than the knowledgeable professional who is blind to even a single weakness.
If "investors" frenetically bought and sold farmland to one another, neither the yields nor the prices of their crops would be increased. The only consequence of such behavior would be decreases in the overall earnings realized by the farm-owning population because of the substantial costs it would incur as it sought advice and switched properties.
Nevertheless, both individuals and institutions will constantly be urged to be active by those who profit from giving advice or effecting transactions. The resulting frictional costs can be huge and, for investors in aggregate, devoid of benefit. So ignore the chatter, keep your costs minimal, and invest in stocks as you would in a farm.

My money, I should add, is where my mouth is: What I advise here is essentially identical to certain instructions I've laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife's benefit. (I have to use cash for individual bequests, because all of my Berkshire Hathaway (BRKA) shares will be fully distributed to certain philanthropic organizations over the 10 years following the closing of my estate.) My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard's. (VFINX)) I believe the trust's long-term results from this policy will be superior to those attained by most investors -- whether pension funds, institutions, or individuals -- who employ high-fee managers.
And now back to Ben Graham. I learned most of the thoughts in this investment discussion from Ben's book The Intelligent Investor, which I bought in 1949. My financial life changed with that purchase.
Before reading Ben's book, I had wandered around the investing landscape, devouring everything written on the subject. Much of what I read fascinated me: I tried my hand at charting and at using market indicia to predict stock movements. I sat in brokerage offices watching the tape roll by, and I listened to commentators. All of this was fun, but I couldn't shake the feeling that I wasn't getting anywhere.

In contrast, Ben's ideas were explained logically in elegant, easy-to-understand prose (without Greek letters or complicated formulas). For me, the key points were laid out in what later editions labeled Chapters 8 and 20. These points guide my investing decisions today.
A couple of interesting sidelights about the book: Later editions included a postscript describing an unnamed investment that was a bonanza for Ben. Ben made the purchase in 1948 when he was writing the first edition and -- brace yourself -- the mystery company was Geico. If Ben had not recognized the special qualities of Geico when it was still in its infancy, my future and Berkshire's would have been far different.
The 1949 edition of the book also recommended a railroad stock that was then selling for $17 and earning about $10 per share. (One of the reasons I admired Ben was that he had the guts to use current examples, leaving himself open to sneers if he stumbled.) In part, that low valuation resulted from an accounting rule of the time that required the railroad to exclude from its reported earnings the substantial retained earnings of affiliates.

The recommended stock was Northern Pacific, and its most important affiliate was Chicago, Burlington & Quincy. These railroads are now important parts of BNSF (Burlington Northern Santa Fe), which is today fully owned by Berkshire. When I read the book, Northern Pacific had a market value of about $40 million. Now its successor (having added a great many properties, to be sure) earns that amount every four days.
I can't remember what I paid for that first copy of The Intelligent Investor. Whatever the cost, it would underscore the truth of Ben's adage: Price is what you pay; value is what you get. Of all the investments I ever made, buying Ben's book was the best (except for my purchase of two marriage licenses).
Warren Buffett is the CEO of Berkshire Hathaway. This essay is an edited excerpt from his annual letter to shareholders.
This story is from the March 17, 2014 issue of Fortune.

Tuesday, February 18, 2014

More pension executives are using daily monitoring

Frozen and closed defined benefit plans lead the trend

“Such monitoring didn't exist five years ago,” said Jonathan Barry, partner in Mercer LLC's retirement risk and finance group, Boston. As more DB plans move to reduce risk — in ways such as establishing liability-based glidepaths for investment changes or using outsourced CIO programs — daily funded status monitoring “has become more and more prevalent, more and more the norm.”
More corporate defined benefit plan executives are keeping their fingers on the pulse of their plans' funding on a daily basis as they move to more risk-based investment strategies.
According to an Aon Hewitt report last month, “2014 Hot Topics in Retirement: Building a Strategic Focus,” 12% of the 220 U.S. employers surveyed said they monitored funded status daily in 2013, and of those that don't, 25% said they were somewhat or very likely to do so this year.
Most of the plans that perform daily monitoring are frozen or closed, and those plans' executives are aware of their long-term liabilities, said Rob Austin, Charlotte, N.C.-based director of retirement research at Aon Hewitt. About half of Aon Hewitt's clients monitor their funding daily.
“Pension funds are taking advantage of market changes that don't coincide with the end of a month or the end of a quarter,” said Mr. Austin. “We're in an age when funded status will change wildly as the market changes wildly.”
Added Mr. Barry: “It's a way of managing an LDI program.”
Daily monitoring “is symptomatic of a trend,” said Thomas Meyers, Chicago-based senior client portfolio manager and head of distribution at Legal & General Investment Management America, a predominately LDI money manager with total assets of U.S. assets under management of $35.2 billion as of Nov. 30. “Clients are engaging consultants and money managers in an accelerated fashion, because they want to get better precision toward bringing their assets and their liabilities closer together.”
The trend toward more daily monitoring has dovetailed with an increase in funded status among corporate DB plans, Mr. Meyers said. According to separate reports earlier this month from Milliman Inc., Aon Hewitt and Mercer, the funded status of U.S. corporate plans ranged from 88% to 92%, increasing from 16 to 22 percentage points in the past 12 months.
Another reason for the higher frequency in monitoring is that “some companies have been burned several times on their funded status,” Mr. Barry said. “Their (pension) funding swings up, then down, then up, then down. It's a question of volatility.”
Along with custodians, investment consultants are providing this information to pension funds, either by giving clients the tools to do the monitoring themselves, or through outsourced chief investment officer programs that provide both the information and the ability to act on the changes. Mr. Barry said information software usually provides index returns to clients, while the outsourced CIO uses actual performance numbers of a client's holdings, calculates the liabilities daily and executes changes based on predetermined glidepath triggers.
Both Aon Hewitt and Mercer offer software for internal management as well as broad third-party monitoring services like outsourced CIO services.
“We know liabilities will move a certain way based on duration,” Aon Hewitt's Mr. Austin said. “It's not hard to determine this.”
Often, the information provided by the investment consultant is combined with data provided by custodians to pension fund clients, Mr. Austin said. “Custodians may not have the underlying data to provide the liabilities, while the consultant may know the liabilities but not the plan's assets,” he said. “Sometimes the pension fund (executive) uses data from both and makes the call. They want to know all this and take action on it.”
At Dow Chemical Co., Midland, Mich., global custodian Northern Trust Corp. provides data that's combined with liability data from the pension fund's staff to monitor funded status daily, said Gary McGuire, CIO. “We have some liability duration guidelines that require daily monitoring,” he said. “We also trade derivatives that have convexity, like swaptions, which makes the measurement somewhat complex.” Dow has $13.5 billion in U.S. pension assets.
Mr. McGuire said the pension staff monitors funded status daily “as best practice. We have the ability to do it … It works very well for us.”
Dow's global pension funds are 75.2% funded, Mr. McGuire said, adding the company does not disclose its U.S. plan's funded status.
While pension funds that use an outsourced CIO service have that third-party firm monitor the funding, resulting changes in allocations aren't done without consulting the client.
Those decisions are based on predetermined triggers in glidepaths established by the pension fund in advance — usually in concert with the third-party provider like a consultant. “They delegate responsibility within constraints that the pension fund has put in place,” Mercer's Mr. Barry said.
“The trigger is generally hard and fast — let's say, changes are made when a plan is 80% funded. There will be a little bit of discretion given to the third party as to where the investment change will land, but they don't just change the asset allocation overall. Generally speaking, the third party doing the monitoring is the same party that helped the pension fund establish the asset allocation in the first place.”
The Dow pension fund does not use daily monitoring to trigger any investment glidepaths, Mr. McGuire said, but could in the future.

Wednesday, February 12, 2014

Daily Journal’s Portfolio Holdings Revealed (CHARLIE MUNGER)

Daily Journal Corporation publishes several newspapers and publications with a specific focus on topics of interest to the legal and real estate professions and also provides specialized information technologies to courts and other justice agencies.  Although Daily Journal’s main lines of business have produced interesting results over the last several years due to dislocations in the real estate markets of California and Arizona, many investors have instead focused on the company’s growing and highly concentrated investment portfolio managed by Daily Journal Chairman Charlie Munger.
In late 2011, we observed that Daily Journal was evolving into a “hedge fund” but the securities within the portfolio have been unknown until recently because the company only provided very high level disclosures without a listing of specific securities.  On February 10, Daily Journal filed its first 13-F report with the SEC which lists the company’s holdings in equity securities traded on exchanges in the United States.  The report reveals that Daily Journal owns shares of Bank of America, Posco ADRs, US Bancorp, and Wells Fargo.  The exhibit below shows the positions listed on the 13-F along with a placeholder for securities that remain undisclosed based on the company’s recent disclosure that the securities portfolio was worth a total of $150,747,000 as of December 31, 2013.
DJCO Securities at 12/31/13
Daily Journal states that the securities “consist of common stocks of three Fortune 200 companies, two foreign companies and certain bonds of a sixth”.  Based on the 13-F filing, we now know that the three Fortune 200 companies are Bank of America, US Bancorp, and Wells Fargo and that one of the foreign companies is Posco which is held in the form of ADRs traded on a United States stock exchange.  As we noted in 2011, Mr. Munger has long been known as an enthusiastic supporter of BYD.  The Munger family owns shares of BYD and Mr. Munger was the driving force behind Berkshire Hathaway’s investment in the company.  It seems plausible that the second foreign company is BYD and that it is not listed in the 13-F because the shares are held on a foreign exchange.
Most investors are familiar with Mr. Munger’s role as Vice Chairman of Berkshire Hathaway and he has clearly played an important role at Berkshire when it comes to security selection and purchase of wholly owned subsidiaries.  However, Berkshire’s portfolio is most closely associated with Warren Buffett and it is difficult to know exactly which decisions at Berkshire are driven by Mr. Munger.
At Daily Journal, which is unaffiliated with Berkshire Hathaway, investors can gain insight into companies that clearly represent Mr. Munger’s highest conviction ideas.  The results of his activities at Daily Journal have been spectacular:  Over the past five years, the securities portfolio has evolved from holding only cash and treasury bills to over $150 million invested primarily in a concentrated equity portfolio with over $102 million in unrealized gains.  The securities portfolio, rather than Daily Journal’s operating business, now represents the majority of intrinsic value and the company’s share price has reflected this success.
Although Daily Journal most likely began filing 13-F reports with the SEC grudgingly, value investors now benefit by having another “superinvestor” to follow on a quarterly basis.

Lee Ainslie Interview: Columbia Business School's Graham & Doddsville

Columbia Business School is out with the Winter 2014 issue of its Graham & Doddsville investment newsletter.  This time, they feature a rare interview with Maverick Capital's Lee Ainslie. CLICK HERE FOR THE NEWSLETTER.

The hedge fund manager talked about how he's always trying to learn new things and how he's read every investing book he can get his hands on.

Some interesting quotes from the interview:

On portfolio positioning: "In terms of sizing, our average long is roughly twice the size of an average short at Maverick and our long portfolio is more concentrated than our short portfolio.  This construction allows us to maintain net long exposure typically between 30% and 60%.  The greater diversification of our short portfolio reflects the riskier nature of these investments and that these positions turn over more frequently, so having a deeper bench of such investments is helpful."

On valuation:  "So while we place great emphasis on valuation in our investment decisions, valuation alone should never be the driver of either a long or a short investment ... I believe it is important to identify a catalyst that should benefit the valuation ... The most commonly used valuation metric at Maverick is sustainable free cash flow in comparison to enterprise value."

On what he looks for in deep dives: "The most critical factor that we're trying to evaluate is the quality of management - their intelligence, competitiveness and, most importantly, their desire to create shareholder value." 

On what he looks for when hiring: "The most important components we gauge include competitiveness, mental flexibility and emotional consistency - that last trait is surprisingly important."  These are pretty similar to what Julian Robertson looked for when he was hiring or seeding funds.

This issue also highlights talks with Jim Grant of Grant's Interest Rate Observer, Dr. Kenneth Shubin Stein of Spencer Capital and Geoffrey Batt of Euphrates Iraq Fund

Monday, February 10, 2014

Wealthfront Tax Loss Harvesting White Paper - A Case Study In How Not To Calculate Tax Alpha

The benefits of reducing current tax liabilities through tax loss harvesting are widely acknowledged - so much, that the IRS developed the 30-day "wash sale" rules to prevent taxpayers from abusing the strategy. Yet less widely understood is that there's one crucial caveat to tax loss harvesting - that taking advantage of the loss also reduces the cost basis of the investment, potentially exposing the taxpayer to a gain in the future that can wipe out some, most, or all of the tax benefit, and in the extreme with today's four capital gains tax brackets actually drive up future tax rates and leave the investor worse off than having done nothing at all.
Notwithstanding these issues, many investors and advisors continue to overstate the benefits of tax loss harvesting, and now "robo-advisor" Wealthfront is doing so as well, with its "Tax-Loss Harvesting White Paper" that purports Wealthfront can increase an investor's wealth by an extra 1%/year, annualized, indefinitely, through its daily tax loss harvesting strategy. Unfortunately, though, the reality is that in a review of its strategy, Wealthfront - like so many others - is confusing tax savings with tax deferral, and in the process may be drastically overstating its benefits by a factor of 10:1, and for its typical investor the true annual benefit may be a mere 1/25th of what their "white paper" claims purport.
Again, this is not to say that tax-loss harvesting is useless, and in reality while many advisors have been automating tax-loss harvesting just like the robo-advisors for almost a decade, Wealthfront's particular tools to implement loss harvesting are unique, especially in how it is able to quasi-pool investor assets to drive the transaction costs down to nothing for its clients (facilitating tax loss harvesting at very small thresholds on a nearly continuous basis!). Nonetheless, the flaws of the Wealthfront tax-loss harvesting white paper also provide a clear example of the problems with trying to come up with a generalized algorithm for an individual's specific and unique tax circumstances, and overall provides an unfortunate case study in how not to calculate tax alpha and try to apply its benefits for a wide range of clientele.

What Is Tax Alpha

The concept of measuring "tax alpha" - or the value of executing good tax strategy - is not new. In the context of portfolios, we can attribute tax alpha to several strategies, including good asset location, as well as the benefits of tax loss harvesting. So-called "robo-advisor" Wealthfront executes automated tax loss harvesting as a key value proposition, and here's how Wealthfront defines the tax alpha associated with its strategy:
TaxAlpha = (STCL * STTR + LTCL * LTTR) / PortfolioBeginningBalance
Definitions:STCL is the short-term net capital loss realized
STTR is the combined Federal and California state short-term capital gain tax rate. We [Wealthfront] use the maximum federal marginal tax rate of 43.4% (39.6% + 3.8% for tax payers who earn in excess of $200,000) and the maximum California tax rate of 13.3.%
LTCL is the long-term net capital loss realized
LTTR is the combined Federal and California state long-term capital gain tax rate. We [Wealthfront] use the maximum federal tax rate of 23.8% (20% + 3.8% for tax payers who earn in excess $200,000) and the maximum California tax rate of 13.3%
PortfolioBeginningBalance is the value of the portfolio at the beginning of each year
For example, imagine someone bought an investment for $100,000 and it declined by 15% to $15,000. If this is a long-term capital loss, the LTCL is $15,000. Given Wealthfront's 23.8% (Federal) + 13.3% (state) = 37.1% assumed tax rate (LTTR = 37.1%), this results in a tax savings of 37.1% x $15,000 = $5,565. Given a starting balance of $100,000, then $5,565 / $100,000 = a tax alpha of ~5.6%. In other words, the amount of (in this case, long-term capital gains) taxes avoided in the current year is ~5.6% of the original account balance.
Given this framework, Wealthfront has produced a hypothetical backtest of how their daily tax-loss harvesting strategy would have fared since the start of the year 2000. Their illustration assumes a $100,000 starting investment, plus $10,000 per quarter of ongoing contributions. Tax loss opportunities were harvested in accordance with the wash sale rules, where an alternative security was bought for 30 days before switching back to the original (which in some cases produced a short-term gain during the 30-day period). Losses were harvested based on a threshold mechanism that required them to be large enough that the loss wouldn't likely be entirely recovered within a 30-day period (as that would effectively convert an entire long-term loss into a short-term gain when switching back to the original investment), which means a declining investment might be harvested for losses several times as it declines (at lower and lower price points for small incremental losses along the way). Transaction costs appear to have been ignored (ostensibly because Wealthfront can actually implement its trades with any separate transaction costs to its clientele). The results of Wealthfront's backtest in terms of Annual Tax Alpha as reported in its own white paper are shown below:
Annual Tax Alpha w- Daily TLH for Wealthfront
Not surprisingly, the results show that the bulk of tax loss harvesting benefits come during bear markets, as that's when the majority of losses occur. While some small losses might occur amongst the various asset classes in the midst of a bull market, those losses are generally absorbed by ongoing rebalancing (which triggers at least modest gains to net against losses), so all of the tax alpha comes from partial- or full-year market declines in 2000, 2001, 2002, 2003, and 2008. Notably, the tax alpha is actually negative in 2007 (rebalancing triggered gains and there were no losses left to offset them) and also in 2009 (the market rebounded so quickly that some long-term losses actually were converted into short-term gains, and they show up in different tax years because the losses got harvested at the end of 2008 and the switchback gains landed in early 2009).
Over the entire time period, Wealthfront notes that the average annual tax alpha was 1.14%, through the combination of big good years, some neutral years, and a pair of bad years (although it appears they calculated the mean annual tax alpha, rather than properly calculating the annualized tax alpha, which would have been slightly lower given the volatility, just as the average return of +50% and -33% is 8.5% but the annualized return is 0% because you actually finish with the same dollar amount you started with).

The Problem With [Wealthfront] Tax Alpha

Certainly, taking advantage of tax loss harvesting and the deductions it brings has value. The problem with tax alpha - at least after a review of the way that Wealthfront is calculating it - is that it fails to capture one key issue: the fact that when a loss is harvested, the cost basis of the investment is reset, downwards, which creates greater exposure for capital gains in the future, and means the tax alpha value of capital loss harvesting is being overvalued.
For instance, going back to the earlier example, the investment had declined from $100,000 down to $85,000, resulting in a $15,000 loss, $5,565 of tax savings, and a 5.6% tax alpha.However, going forward this investment now has a cost basis of $85,000 - since the loss was harvested - which means in the future, if/when/as it recovers back to $100,000, there will be a $15,000 gain. At the same 37.1% tax bracket, that results in a $5,565 tax liability, and anegative tax alpha of -5.6%! The net result? The investment is once again worth $100,000, for a total gain/loss of 0%, and the positive 5.6% and negative -5.6% tax alphas cancel each other out entirely. This assumes, of course, that the investment does in fact recover, and is in fact sold at the end. (While appreciated securities can be donated to avoid capital gains, and/or those who buy and hold to the end of life can receive a step-up in basis, given that Wealthfront's clientele are millenials who someday wish to retire, it seems far more likely that as a baseline assumption, investments will be sold for retirement or other spending purposes, or that gains will be recognized through rebalancing, long before these clients donate it all away or die sometime around the end of this century!)
The reality that harvesting losses produces subsequent gains of an offsetting and matching amount, though, presents the first major problem with the Wealthfront analysis; after systematically harvesting losses throughout the time horizon, they fail to account for the huge embedded gain that would be present by the end - especially given the massive bull run in equities since the trough in 2009. Since that time, the S&P 500 is up well over 100%, but Wealthfront only reported the positive tax alpha from the loss harvesting and conveniently fails to acknowledge the huge negative tax alpha embedded in the investments at the end of the time horizon! If the cost basis had really been reset all the way down at the market bottom through daily tax loss harvesting, a gain of 100%+ at their 37.1% tax rate assumptions means there's a -37% tax alpha looming at the end of this chart. Ironically, this much negative tax alpha would actually obliterate the entire value over the time horizon (technically it could actually be worse, as the cumulative tax alpha may well turn out to be negative, given the ongoing systematic investments since 2009 have only net gains and no prior losses to recognize!)! Of course, this reality that the negative tax alpha at the end will offset the positive tax alpha earlier reported is simply a mathematical reality, but one that Wealthfront's methodology implicitly ignores by not adjusting for a growing level of embedded capital gains at the end of the time horizon.

True Value Of Tax Loss Harvesting

To be fair, though, this doesn't mean all is lost for tax loss harvesting. Notwithstanding the flawed Wealthfront tax alpha analysis, there is a value to tax loss harvesting. It's the value of keeping those extra tax dollars that would have gone to Uncle Sam to stay in our pocket (or really, in our portfolio) in the meantime. That still has some true economic value.
For instance, continuing the earlier example, the $15,000 loss resulted in $5,565 of tax savings that could remain invested. Assuming an 8% growth rate, that $5,565 that remained invested would have produced an extra $445.20 of growth. Relative to the original $100,000 investment, this means the true annual economic benefit of tax deferral - essentially, the "time value of money" of having those tax dollars invested on your behalf and paying the bill later - was $445.20 / $100,000 = 0.45%. At least, for the year where a big loss occurred (producing the big tax deduction and tax savings to keep invested). The chart below recreates the Wealthfront "tax alpha" in blue, and then in green shows the true annual economic benefit that the Wealthfront "tax alpha" would have produced, assuming an 8% growth rate on the dollar amount of tax savings (but recognizing the tax savings itself will be repaid in the future when the investment recovers).
Wealthfront Tax Alpha vs True Economic Benefit of Tax Loss Harvesting
In case you're having trouble seeing the "green" parts of the chart that represent the true economic benefit of the tax deferral, you should. They're tiny green bars. Almost by definition, the height of each green bar representing the true economic benefit is 8%, or 1/12th of the blue bar symbolizing tax alpha. Which means that while Wealthfront was claiming an average annual tax alpha of 1.14%, the true economic value of their strategy was closer to 8% of that 1.14%, which is about 0.09%. Or stated another way, Wealthfront was overstating the true economic value of their tax loss harvesting by a factor of about 12:1.
To be fair, it's worth noting that over a 13-year time horizon, this framing will slightly understate the cumulative value of systematic tax loss harvesting, because the harvesting benefits at the beginning do compound over the whole time period (and "fortunately" for the Wealthfront backtest, there are big tax losses to harvest with the tech crash at the beginning, though I'm sure it's no coincidence that Wealthfront chose the peak of the tech bubble as a starting point for their illustration). Of course, the reality is that compounding a 0.09% tax savings won't amount to all that much, and it's even less given that their example assumes ongoing contributions (with a $100,000 starting balance and $520,000 of cumulative contributions dollar-cost-averaged into the market over the span of 13 years, that $445.20 economic value of tax savings just doesn't compound enough to be all that much more material).
On the other hand, while compounding means that just looking at the true one-year economic benefit of tax loss harvesting will slightly understand the compounding cumulative benefits of tax deferral - once properly calculated at about 1/12th the value that Wealthfront claims! - there are also several issues that may still be causing Wealthfront to systematically overstate the realistic value of tax loss harvesting for most [of its] investors.

Further Complications To The Value Of Tax Loss Harvesting

The first additional concern regarding the value of tax loss harvesting emerges with a review of Wealthfront's tax assumptions themselves. To amplify the value of tax deferral, Wealthfront assumes an investor facing the maximum Federal income tax rates, along with living in California with the highest state income tax rate. This is how they reach a whopping 37.1% long-term capital gains assumption.
However, the reality is that in order to reach the top Federal income tax bracket - where the top capital gains rates apply - the investor must have taxable income (that's after all deductions) of $405,100 in 2014 (or $457,600 for a married couple, and a married couple needs more than amillion of income to hit the top California bracket as well!). Given that Wealthfront recently announced they had crossed half a billion of AUM and were up to $538M with 6,000+ clients, some simple napkin math shows that their average investor has around $90,000 of total assets with them. Only 16% of Wealthfront clients even have reported a liquid net worth over $1,000,000, and 58% of Wealthfront clientele are Millenials aged 18 to 35. To say the least, it seems unlikely that the average client being a 20- or 30-something with $90,000 of investments is really staring down annual taxable income in excess of $400,000 to be subject to the top Federal tax rate (and it's over $500,000 to hit the top California rate, or $1,000,000 as a married couple to hit that top bracket!). Granted, Wealthfront does have a techie-centric presumably-high-income professional clientele, and one recent survey indicated the average Silicon Valley software engineer is starting at $165k, but the actual capital gains tax rate for someone at that income level is 15% (and the California rate is only 9.3%, for a total capital gains tax rate of 24.3%).
Unfortunately, though, using a more realistic 24.3% tax rate instead of 37.1% cuts the tax loss harvesting benefit by about 1/3rd, from 0.09% of true economic benefit down to only about 0.06% of annual economic value. And if the investor actually lives in Texas, Nevada, Florida, or some other state without a state income tax, where the capital gains rate is 'just' the Federal 15% with no state income tax? Now the true annual economic benefit of tax loss harvesting is down to an average of about 0.04%, or about 1/25th the value that Wealthfront states in its white paper.
In turn, even that benefit assumes that when a loss occurs, it can actually be used for tax purposes. After all, the capital loss rules limit the deduction to only apply against capital gains (with a small $3,000 ordinary loss for any excess that doesn't amount to much when Wealthfront assumes its typical client earns more than half a million dollars annually!). Thus, given that Wealthfront started its example in 2000, there would be no gains to offset at that time, and the bulk of the losses would actually just manifest as loss carryforwards that wouldn't actually start getting used until rebalancing trades began to trigger material gains in 2004 and beyond. So even when acknowledging the compounding benefit of the tax deferral value, the clock for losses harvested during the tech wreck wouldn't have begun until several years later; in other words, the blue bars in the 2000-2003 time frame should mostly be appearing in 2004-2006 or so, allowing less time for the economic value to compound at all. Of course, a tiny portion of the losses would have been deductible at ordinary income rates, but at the more-realistically-Wealthfront-typical $165k of income the individual's ordinary income bracket would have only been 28% + 9.3% = 37.3% (which means what Wealthfront was assuming for capital losses in the first place should actually have been the ordinary income rate!), and the tax alpha would have been $3,000 x 37.3% = $1,119 or 1.1% calculated Wealthfront's way (assuming the first year where the account balance was still only $100,000 and there weren't more contributions), which again is only about 0.09% when adjusted to account for the true economic benefit of tax deferral at an 8% growth rate.
Another complication of the Wealthfront approach is that systematic loss harvesting can actually create an even more unfavorable result by creating a large deferred tax liability for the future. For a simplified example, assume a scenario where the investor takes a $10,000 loss on a $100,000 portfolio, and with ongoing $40,000/year contributions actually manages to continue to find $10,000 of "temporary" losses to harvest from the portfolio each and every year. For our Wealthfront engineer client facing a 24.3% capital gains rate, this produces $2,430 of tax savings each year (Wealthfront would characterize this as a 2.4% tax alpha). However, if this was done systematically for a decade, by the end of the decade the cost basis through loss harvesting has been so whittled down that there is now an extra $100,000 capital gain looming, as shown below assuming $100k starting balance, $40k end-of-year annual contributions, and 8%/year growth (B&H is for buy-and-hold, TLH assumes annual $10,000 losses being harvested):
Tax Loss Harvesting vs Buy And Hold with Adjusted Cost Basis
As the chart above shows, while the value of the TLH strategy is slightly higher than the value of the B&H scenario, the cost basis of the TLH strategy is materially lower than the B&H scenario, which in turn will chop away most (though not quite all) of what little excess there is for the TLH strategy over just buying and holding. In other words, at the end of the chart, the TLH client is exposed to an extra $100,000 of looming capital gains above and beyond what the B&H investor faces.
Yet the caveat is that in our engineer's situation, the outcome actually is worse, because at his $165k income, liquidating an extra $100,000 of capital gains can actually drive his capital gains rate up, pushing him over the line of the 3.8% Medicare surtax on investment income. As a result, while the engineer was saving $2,430 x 10 = $24,300 in taxes over the decade, liquidating them at 24.3% + 3.8% = 28.1% is a tax liability of $28,100. In other words, the investor is $24,300 (savings) - $28,100 (final taxes) = -$3,800 of taxes in the hole because ofthis "negative tax arbitrage" effect, where systematic loss harvesting produces such large future gains that it actually drives up the future tax bracket, resulting in less wealth through tax loss harvesting.
The effect can be even worse for lower income investors (e.g., those Wealthfront participants who perhaps aren't at the Silicon-Valley-engineer salary level). For married couples whose taxable income after all deductions is below $73,800 (in 2014), the long-term capital gains tax rate is actually 0%! Which means systematic loss harvesting produces a tax savings of... nothing. At all. The tax alpha is zero. You can't get an economic benefit from tax deferral when there is no tax liability to defer! Except it does reduce cost basis, increasing exposure to gains in the future, and potentially turning 0% capital losses into 15%+ capital gains, resulting in a significant destruction of wealth! In such scenarios, the wealth creation strategy is actually not automated loss harvesting at all, but harvesting gains instead.
More broadly, the simple reality is that capital gains tax planning is far more complex than just always harvesting losses to attempt to defer a tax liability, given our current progressive four bracket capital gains tax structure with the new top bracket and the 3.8% Medicare surtax where pushing too many gains out to the future actually leads to a higher tax bracket when they're actually liquidated, and those eligible for 0% rates should actually be harvesting gains to take advantage of their "free" annual step-up in basis!

Overstating Tax Benefits As An Investment Value Proposition

While simply overstating the value of tax deferral in a white paper is one thing, the concern in the context of Wealthfront is that they convert their overstated tax alpha benefit into an actual wealth compounding factor. For instance, the chart below from their website shows an investor who has $52k of greater wealth due to a 0.93% additional compound growth rate on investments due to "tax alpha" for capital loss harvesting - i.e., they literally project future wealth to grow at an extra 0.93%/year of annual return based on their estimated tax alpha.
However, the problem, as we now know, is that they are failing to disclose that the red line in the chart below - the greater value due to systematic loss harvesting - would have a substantially lower cost basis than the blue line and a much larger embedded capital gain that would wipe out virtually all of the differential, as already shown in the figure earlier (in other words, the Wealthfront illustration below only shows the gross value of the two lines and not the different cost bases and significantly different embedded tax liabilities associated with each). And of course, this also ignores the fact that as previously shown, the true economic return differential isn't ~1% of tax alpha in the first place, but closer to 0.09% instead (which is the outcome once the fact that the two lines have substantially different cost bases is accounted for).
Wealthfront Tax Loss Harvesting Mountain Chart
Similarly, the Wealthfront home page explains their economic value as shown below, again implying an additional average annual growth rate of 1.0% attributable to tax loss harvesting, even though the true economic value should be no more than a fraction of that even at top tax brackets, and even less for what Wealthfront itself proclaims is their "typical" investor - a millenial engineer who has $90,000 invested with them... and isn't likely facing a marginal tax anywhere rate near the top tax brackets. And of course, that assumes the investor is using a taxable account in the first place, and not a retirement account where the built-in tax deferral means there is no value to tax-loss harvesting (though Weatlhfront's charts do not exactly make it clear that the benefits apply exclusively to brokerage accounts).
Wealthfront Value-Adds
In addition to all these concerns, there's also the simple fact that the Wealthfront tax loss harvesting alpha is even further overstated by their choice of time horizons for their hypothetical back test. As their own charts show, the bulk of tax loss harvesting value is created in the midst of significant bear markets, while no tax alpha is produced in bull markets (and in fact the tax alpha can even be negative as rebalancing trades trigger capital gains recognition in the midst of an extended bull market with no available losses to harvest). Thus, Wealthfront's backtest starting point of the year 2000 is notable. Had they backed it up to start in the early 1990s instead, nearly doubling the length of the time period but with a long bull market that would have produced negative tax alpha for a decade and few opportunities to produce positive tax alpha, that alone would have cut their annual tax alpha by as much as 50% (as the same benefits from two bear markets would have been averaged over twice as many years), dropping it to little more than 0.50% and the true economic value (still assuming an 8% growth rate) to only about 0.05% (or no more than 0.02% or 0.03% per year with more realistic tax bracket assumptions). Notwithstanding their cherry-picked time horizon, it's also notable that on a net basis, even with their approach and favorably-chosen time period, the tax loss harvesting strategy has actually produced virtually no "tax alpha" since 2004, as the one positive year in the past decade - 2008 - was entirely offset by the negative tax alpha in 2007 and 2009 (because their rebalancing slowly started to force them to recognize some, but still not all, of the giant embedded tax liability their strategy is creating).
In the end, it's worth noting that none of this is meant to suggest that tax loss harvesting is a bad thing to do. With the exception of doing it so extensively that it drives up future tax brackets - or for those who are currently eligible for 0% capital gains rates - it does have some value, especially if it can be implemented systematically and inexpensively (as many advisors have already been doing for a decade on an automated basis with rebalancing software like iRebal and long before that with "manual" spreadsheets). And frankly, Wealthfront's tax loss harvesting capabilities are unique, in that their platform allows daily tax-loss harvesting to be executed without any net transaction costs to investors, a substantial difference from advisors where even low transaction costs do increase the friction of implementing loss harvesting strategies.
Nonetheless, the loss harvesting value must be measured on the basis of the true economic benefit, not the gross tax savings as a misrepresentative form of "tax alpha", should be done with realistic tax assumptions for the client (and not overstated with tax assumptions that clearly exceed what is known to be the average client), and especially should not be converted into an annual return that's assumed to compound for 20 years without accurately characterizing the tax results throughout the time horizon or at the end in the form of the growing embedded gain that the strategy creates.

Where Does Wealthfront Go From Here?

To be fair, the problem of overstating the benefits of tax loss harvesting and tax deferral is not unique to Wealthfront; there are many advisors who do the same thing, which is why this blog includes many cautionary posts that capital loss harvesting may be overvalued. Which means this review of the issues with Wealthfront's tax loss harvesting white paper is far more a case study of the problem than the sole instance of it.
Nonetheless, one might expect that a technology company which is built on the basis of having savvy mathematical algorithms control your portfolio would know how to do the arithmetic of tax and cost basis calculations properly, yet this error has remained in their tax loss harvesting white paper for nearly a year. Perhaps this is the problem with trying to build an "online financial advisor" platform with savvy tax strategies using only an Investment Team and sharp engineers but without actually having a CFP or CPA in a high-level advisory or leadership position? And lest anyone think this is just picking on a robo-advisor out of the blue, it's worth noting that I've pointed this issue out to the Wealthfront leadership repeatedly over the past year to give them a chance to fix it, yet the issue has remained unaddressed and unresolved.
And then again later last year after an article by Felix Salmon that inappropriately extolled their overvalued tax alpha calculations:
Of course, the reality is that Wealthfront can fix this issue, and hopefully will do so sooner rather than later for their own sake (as Ray Lucia found, misstating the projected investment returns of your strategies due to a faulty backtesting white paper can get you banned by the SEC!). And "fixing" the issue of misstating tax loss harvesting benefits will not completely undermine the Wealthfront value proposition, both because their particular no-transaction-cost implementation of loss harvesting is unique, and because as noted above they claim to deliver other benefits as well (though ironically, those Wealthfront benefits almost perfectly mirror the advisor benefits researched by Morningstar's David Blanchett as "advisor Gamma"!).
From a broader perspective, the fact that Wealthfront has been drastically overstating the value of its tax harvesting strategy doesn't make the presence of such "robo-advisors" irrelevant. In fact, I've repeatedly noted that robo-advisors like Wealthfront, along with its similar counterpartBetterment, are steadily commoditizing the core construction of a passive, strategic portfolio for investors, which is a genuine cost-reduction value for consumers and will force advisors to continue to evolve to a more genuinely-personal-advice-centric value proposition. And while the reality is that many advisors have been doing this with their own software for nearly a decade already - no matter what the robo-advisors claim, their implementation of these strategies using technology is not new nor unique - the 'robo-advisors' are finding ways to potentially make it even more efficient, especially through their quasi-pooled investment structures that are allowing them to execute transactions for clients without needing to apply any separate/additional transaction costs (how they actually do this is a conversation for another day).
Yet at the same time, this entire exercise illustrates perhaps the greatest weakness of Wealthfront: that developing broad-based algorithms for investment purposes can miss out on the nuances of individual tax planning - an entirely different core competency that must be integrated into the picture, as advisors routinely do and "robo-advisors" are still struggling to do. The situation is especially true given that Wealthfront will harvest losses for all clients on an ongoing basis, regardless of the fact that for some doing so will eventually drive them into a higher tax bracket and destroy wealth, while for others it should not be done at all because they're young and in the lower tax brackets and eligible for 0% capital gains rates and consequently harvesting gains is the best strategy for them. These are the exact kinds of nuances that good advisors can address when doing client-specific personalized financial advice that is beyond at least today's algorithm-based robo-advisors broad-sweeping investment implementation. In other words, Wealthfront's failings in this regard demonstrate exactly why some investors that need more individually-suited tax-sensitive advice must be cautious of a robo-advisor that looks solely at investments and fails to take into account the whole personal financial planning picture.
But who knows, perhaps this article will just propel Wealthfront forward to improve their offering, and bring even more attention to them, because there's no such thing as bad press, right?

Thursday, February 06, 2014

2013 Hedge Fund Performance Numbers

Some media members have bashed hedge fund performance, but it is worth noting that at least in the long/short equity segment this year, many of these funds captured 2/3rd's of the market upside while only being 30-40% net long.

After all, a true hedge fund is just that, hedged.  There's no question that short selling was tough in 2013 and by definition, many L/S hedge funds won't capture all the upside in big up years (like 2013).

As always, it's worth examining the entire picture (risk, exposure levels, etc) and the entire spectrum of returns.  Undoubtedly, there will be outperformers and underperformers.

Not to mention, it's probably more prudent to fixate on 3-year, 5-year, or even 10-year numbers anyways.  But in the short-term focused world, the 1-year performance number reigns.

The S&P 500 was up 29.6% in 2013.  Here's how prominent hedgies fared.

2013 Hedge Fund Performance Numbers

Glenview Capital Opportunity Fund: 84% (through end of Oct)

Appaloosa Palomino Fund: 42.1%

Bridgewater All Weather: -4%

Bridgewater Pure Alpha: 5.25% 

Paulson Recovery: 63.18%

Paulson Advantage: 26.05%

Paulson Advantage Plus: 27.22% 

Perry Partners: 20.25%

Pershing Square: 9.29%

Trian Partners: 40.06%

Owl Creek: 48%

Millennium: 13.07%

Visium Global: 16.93%

Eton Park: 22.3%

Children's Investment Fund: 47%

Theleme Partners: 19.41% 

Whitebox MultiStrat: 18.09%

Lone Pine Cascade: 30.3%

Lone Pine Cypress: 18% 

Lone Pine Dragon: 9.8%

Conatus Capital: 23.6% 

Farallon: 15.3%

Matrix Capital: 56% 

Elliott International: 11.6%

Discovery Global Opportunity: 27.5%

Marcato International: 26.16%

Luxor Capital: 17.6%

York Investment: 18.27%

Joho Capital: 29.46%

Lansdowne European Equity: 21.51%

Odey European: 25.78%

Kingdon Offshore: 23.69%

Passport Global: 18.98%

Passport LongShort: 19.89%

Passport Special Opportunities: 45.5%

Cobalt Offshore: 8.84%

Elm Ridge Capital: 22.28%

Eminence Capital: 14.64%

Highbridge LongShort: 15.34%

Ivory Capital: 17.07%

Ivory Enhanced Fund: 28.31% 

Omega Advisors: 30.02%

Zweig-DiMenna: 17.33%

Greenlight Capital: 18.7%

Tosca Opportunity: 56%

JAT Capital: 30.6%

Tiger Global: 14%

Maverick Fund: 16.3%

Maverick Long: 32% 

Hound Partners: 16%

Coatue Management: 20%

Viking Global Equities: 22.6%

Viking Long: 38.4% 

Valinor Management: 23.4%

Glade Brook Capital: 19.76%

Falcon Edge Capital: 28%

Glenhill: 28.7% 

Highfields Capital: 27.3%

Bridger Capital's Swiftcurrent Fund: 20.6%

White Elm Capital: 23.6%

MFP: 31.5%

Tybourne Capital: 16.04%

Fairholme: 33% 

Jericho Capital: 33% (through end of Nov)

Beacon Light: 21.13% 

2013 Credit Hedge Fund Performance 

BlueCrest MultiStrat: 8.98%

BlueMountain LongShort Credit: 7.57%

Brevan Howard Credit Catalysts: 12.21%

Ellington Credit Opportunities: 15.55%

Kingdon Credit: 14.58%

Pine River Credit: 13.09%

Saba Capital: -3.61%

Canyon Value: 14.71%

Davidson Kempner: 19.98%

King Street: 11.43%

Monarch Debt Recovery: 16.12%

Paulson Credit Opportunities: 21.8%

Silver Point Capital Offshore: 15.88%

2013 Macro Hedge Fund Performance 

Tudor BVI Global: 13.98% 

Moore Global: 16.99%

Rubicon Global: 18.25% 

Trend Macro: 11.88%

Lunch is for wimps

Lunch is for wimps
It's not a question of enough, pal. It's a zero sum game, somebody wins, somebody loses. Money itself isn't lost or made, it's simply transferred from one perception to another.