This article is ridiculous. Assuming volatility as a proxy for risk is problematic though Institutions like to use it as a tool to justify poor performance and high fees. If you consider a stock with a large upward move for fundamentally solid reasons like eg NVIDIA in the past 5 years its volatility would increase meaning it's riskier but it's actually got good reasons behind it. It should actually be considered less risky.
The author also advocates taking leverage based on the higher Sharpe ratio of a hedge fund. It's likely by now most people know leverage introduces risk rather than mitigates. And this risk remains hidden till something happens. There are lots of strategies eg correlation funds that are based on making money for years and demonstrating a decent sharpe ratio but are inherently at risk of blowing up on a shock event. And history tells us that these events happen more frequently than we think. And leverage exacerbates this.
The volatility in the s and p comes from people trying to piece together business and macroeconomic information. It's hard to figure this stuff out looking forward. This is often wrong in the short term but right in the long term so the market filters out to the truth ultimately.
(Note: Jeff does mention in a footnote that volatility is not perfect though that is a very important point as is the hidden risk of leverage. Betting on the top 500 companies in America seem like a lot lower risk to me over the long term than any Hedge Fund strategy I've seen)
Very astute way to look at returns versus risk. Most people are unaware of the counterfactuals involved!
Thank you, Davis! I'm glad you enjoyed this!
This article is ridiculous. Assuming volatility as a proxy for risk is problematic though Institutions like to use it as a tool to justify poor performance and high fees. If you consider a stock with a large upward move for fundamentally solid reasons like eg NVIDIA in the past 5 years its volatility would increase meaning it's riskier but it's actually got good reasons behind it. It should actually be considered less risky.
The author also advocates taking leverage based on the higher Sharpe ratio of a hedge fund. It's likely by now most people know leverage introduces risk rather than mitigates. And this risk remains hidden till something happens. There are lots of strategies eg correlation funds that are based on making money for years and demonstrating a decent sharpe ratio but are inherently at risk of blowing up on a shock event. And history tells us that these events happen more frequently than we think. And leverage exacerbates this.
The volatility in the s and p comes from people trying to piece together business and macroeconomic information. It's hard to figure this stuff out looking forward. This is often wrong in the short term but right in the long term so the market filters out to the truth ultimately.
(Note: Jeff does mention in a footnote that volatility is not perfect though that is a very important point as is the hidden risk of leverage. Betting on the top 500 companies in America seem like a lot lower risk to me over the long term than any Hedge Fund strategy I've seen)