Ridiculous Outcomes

ETFs are having a bad year.

Wait a minute, “ETFs are having a bad year?” That doesn’t make any sense.

There are ETFs that track a stock index  There are ETFs that invest in commodities. There are ETFs that invest in emerging market stocks with low volatility. These investment vehicles come in all different shapes and all different sizes.

General statements like “ETFs are having a bad year” lack any meaning. And yet, we hear on a daily basis that “hedge funds have stunk it up for the last few years.”

There is a chapter in Factfulness in which Hans Rosling describes “The Generalization Instinct”. He says, “Everyone automatically categorizes and generalizes all the time.” Generalizing is easy and in many cases it makes sense. If somebody asked you “how did stocks do today,” you’re not going to read them the returns of all 500 S&P stocks. You’re just going to tell them that the Dow gained 85 points, or 0.6%. Certain things, however, abhor generalities. Rosling uses Africa as an example.

Africa is a huge continent of 54 countries and 1 billion people…It makes no sense to talk about “African countries” and “Africa’s problems” and yet people do, all the time. It leads to ridiculous outcomes like Ebola in Liberia and Sierra Leone affecting tourism in Kenya, a 100-hour drive across the continent. That is farther than London to Tehran.

It makes sense to put things into buckets, but we have to be careful that we’re comparing apples with apples. U.S. Large Cap long only hedge funds should be compared to the S&P 500. Long/short equity, however, should not, and saying that hedge funds are having a bad year just doesn’t make sense. It’s like saying that food is bad for you. Generalizations like this often lead to ridiculous outcomes.

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