Reducing Risk, The Key to Increased Profits
The WSJ reports, “hedge funds performed significantly better than equities indexes in the last decade and did so with less volatility . . . Hennessee Group said its hedge-fund index rose 88% from 2000 through 2009, compared with a 9.3% decline in the Dow Jones Industrial Average, a 23% fall in the Standard & Poor’s 500-stock index and a 44% plunge in the Nasdaq Composite.”
The key: hedge funds were LESS RISKY, by a lot. When the S&P 500 was up, hedge funds captured only half the upside, but when the S&P was down, hedge funds suffered only a fifth the loss.
As we show in Panic, the fundamental theorem of Modern Portfolio Theory, which has been the cause of every major market crisis of the past 20 years, is that returns are a linear function of risk: more risk (volatility) equal higher returns. If the hedge fund movement has one uniting principle, it is rejecting this idea. True hedge fund managers, not the institutional poseurs, overwhelmingly agree that reducing risk is the key to increased profits in securities markets, just as it is in the real economy.
Tags: Dow Jones Industrial Average, economy, Hedge Funds, Modern Portfolio Theory, profit, risk, S&P500, securities markets, WSJ
