The new paper, The Rate of Return on Everything, 1870-2015, a tremendously informative research piece on long-term rates of return also happens to address one of the key issues concerning the cause of inequality discussed by Thomas Piketty in his book Capital in the Twenty-First Century. Piketty draws the provocative conclusion that inequality grows over time because the rate of return on wealth is higher than the growth of GDP. Wealth accumulates to those that have it and not to those that try and ride the wave of GDP growth. Given the positive discrepancy between “r”, the return on wealth, and “g” the growth in GDP, the gap of inequality will only grow over time.
“The rate of return on everything” shows that “r” is greater than “g” by a fair margin, but there are extended periods of negative returns and the return on wealth is highly variable. If you want to join the wealthy class, you have to save to have money to invest. As important, you have to control your wealth return to ensure you don’t lose your wealth. Inequality is a problem but wealth-holders take on risk and the certainty of gains are not guaranteed.
After hundreds of discussions with hedge fund managers, I am still surprised that there is a fear of revealing investment processes under the assumption that someone will steal their ideas and intellectual capital. There are few investment styles that are truly unique and special. What is special is still strategy execution – the practical process of delivering returns. Skill is with the decision-making execution of information and strategy.
All hedge funds are not created equal as the return box chart shows for the post Financial Crisis period. There is a significant amount of dispersion across hedge fund styles. Over the period 2009-2018, the difference between the best and worst hedge fund category is almost 7 percent after we account for global equities and bonds.
The attraction to private equity and other less liquid alternatives is clear from the Guide to Alternatives by JP Morgan Asset Management. The return profile is much higher for private equity and debt funds than more liquid alternatives and global bonds; however, the dispersion in returns is multiples higher than what can be expected from other public categories.
