What would Jack Bogle think?
The legendary Vanguard founder, who died three years ago, at the age of 89, is known to have advised investors to avoid anything fancy in their retirement portfolios, 401(k) plans and IRAs.
Bogle’s usual advice to the average investor has been to stick with a low-cost US stock market index fund for long-term growth, such as VTSAX,
But here, about which little is known and rarely talked about, Vanguard operates what looks suspiciously like a hedge fund.
And he crushes her. Vanguard Market Neutral Fund VMNFX,
It even posted small gains on Red Thursday, when the Dow plunged 1,000 points and almost everything collapsed.
The fund is up a third of a percentage point for the day. (Nasdaq Corporation,
: down 5%.)
The Vanguard Market Neutral Fund is up 9.5% so far this year, despite the declines in stocks and bonds. (Vanguard Balanced Index Fund VBAIX,
Which is 60% of US stocks and 40% of US bonds, it lost 12%).
It has gone up a staggering 26% over the past 12 months, while the balanced fund has lost 5%.
Ironically, it easily outperforms its rivals from expensive and exclusive hedge funds. According to hedge fund index firm HFRI, the “stock-market-neutral” hedge fund has performed significantly worse than the Vanguard Fund’s over 1, 3 years so far this year.
I was so intrigued with this Vanguard Vanguard box that I called the company, and ended up speaking to Matthew Jiannino, Head of Product Management for Vanguard’s Quantitative Equity Group.
The first thing to note is that Vanguard is excited about calling this a “hedge fund”, because of all the connotations this phrase has about high risk etc. This is a regulated mutual fund for individuals, operating expenses are very low, Bogley 0.25% per annum. Jiannino says he does not use leverage and aims to “control risk”.
On the other hand, if it looks like a duck, walks like a duck and quacks like a duck, then it’s probably a duck, and this chest is what the original classic “hedge” boxes looked like. It is “long-short”, meaning that it is betting that some stocks will rise (“long” in stock market terminology) and others will fall (“short”). Jiannino says the book is balanced, with the higher and lower bets of the same size, so this performance is not correlated with stock market indices.
The fund’s latest move came after a period of several years in which it underperformed. Like many investors, it was left behind by the massive boom in big tech stocks in the late 2010s.
Giannino says the fund usually makes positive bets on high-quality names. He’s not a “value” investor who just buys stocks in relation to today’s fundamentals, but is looking for companies with good growth prospects that are trading at a reasonable price, he says. “We have a tendency to grow, but it’s a tendency to grow backed by quality,” Jiannino tells me. Stocks are picked by a small in-house quantitative team, which appears to be doing a better job than much of the Ferrari crowd in Greenwich, Connecticut.
Does this belong in a typical investor portfolio? Maybe not. In general, someone who wants more stability in their portfolio is advised to keep things simple and put some money into something like short-term bonds. Vanguard emphasizes that the Market Neutral Fund targets “savvy investors” who may allocate “5-10%” of the portfolio to the fund. It can come in handy, especially at times like last year. The minimum investment is $50,000.
On the other hand, I noticed that the Market Neutral Fund produced a better 10-year performance than the Vanguard Short Term Bond Fund VBIRX,
Especially so far this year. The fees are surprisingly low, and the main expense ratio is over 1%, but it’s a somewhat misleading number that reflects the cost of short or “low” bets. Operating expenses 0.25%.
I prefer owning this over most top hat hedge funds, which ship an arm and a leg and offer bupkis. When you look at the Vanguard fund, you wonder how these other managers get away with their fees.