Hedge funds keep two-thirds of profits

[Same Lazy Element]

Good points, but they do show a level of corruption and self-serving at either some hedge funds, or many hedge funds that reach specific capacity or own capital.

It's a business. Despite what AT&T would make you believe, customers priorities come dead last after more important things like profits to the owners, staying power, cost efficiency etc.

However, what’s the percentage of hedge funds that offer actual value while charging reasonable fees, and either outperform the market or their clients’ goals?

I would say 20-30% of funds actually deliver on what they have promised (alpha with low beta that justifies the fees). The key problem these days is that most portfolio managers that have any meaningful alpha choose to go to platforms or existing funds (which are usually oversubscribed), while people that have some form of public profile end up opening a fund (cue Paulson etc).

 

[guru]

interesting, so your assessment is the workers/business (in this case the funds aka wall street be berry bad) should "share" more of the profit? and more of the risk? correct?

Lets imagine, if I was managing a fund, and am willing to accept your investment, why should I have to give you more of the upside? Try selling me right now.

Imagine I am competent and experienced in this business and likely dont have an issue of people looking to park their reserves somewhere for someone else to manage, and if I'm good at my trade I may be even thinking of telling you to go **** yourself from the beginning and manage your own ****ing portfolio, but lets imagine you caught me at a good time and I may be willing to hear you out...

So sell me...


lets play a little berry berry bad wall street advocate :O)

You asked “Lets imagine, if I was managing a fund, and am willing to accept your investment, why should I have to give you more of the upside?” and I answered that you should not run a hedge fund if you don’t offer great value. So if you don’t have talent then you should find a job and not run a hedge fund.
That is the answer to your question.

While if you or someone has talent and can offer value then people will pay him whatever they need to get in. And then this whole discussion doesn’t apply and is irrelevant.
The discussion is about hedge funds losing clients’ money that results in 64% in fees. Simple as that.

 

[guru]

I would say 20-30% of funds actually deliver on what they have promised (alpha with low beta that justifies the fees).

I don’t believe this, and partially because of you..., because you don’t believe in retail-sourced alpha.
Logically, I’d assume that some alpha would either spill-in from retail or into retail strategies, and some of those would work too. And surely some fund managers were retail traders at some point as well.
So assuming no retail strategies work then it’s hard to believe that only hedge funds would generate alpha, and so many of them.
This is not exactly what I think, just arguing the point in terms of retail trading, but I do think that realistically less than 15% hedge funds could even justify their existence. And less than 5% can offer substantial value where investors wouldn’t be concerned about investing (vs being afraid of uncontrolled risks).
Though I don’t know enough about this industry, just think that my opinion would be in line with what most people think.

 

[Stockboy]

the markets decide on "value" whether youre opening up a carwash or an international cruise line, or a bank. but Im not going to start bickering. moving on...

but we have made a breakthrough as you have admitted you would be willing to pay whatever the price if you felt the product was worth it. this is a very important milestone because from the original post (and members posts) it could easily be read as, "man when they are making money we should be making more"

So apparently the beef is the risk on the downside, and you feel that if your money manager loses that year you should be able to not pay him/her for managing your portfolio? is that the premise?

 

[guru]

the markets decide on "value" whether youre opening up a carwash or an international cruise line, or a bank. but Im not going to start bickering. moving on...

but we have made a breakthrough as you have admitted you would be willing to pay whatever the price if you felt the product was worth it. this is a very important milestone because from the original post (and members posts) it could easily be read as, "man when they are making money we should be making more"

So apparently the beef is the risk on the downside, and you feel that if your money manager loses that year you should be able to not pay him/her for managing your portfolio? is that the premise?

Not exactly but close. Losing years are acceptable if an investor manages not to look like a sucker who ended up making 10% total over 10 years (1% per year) while everyone else doubled their money by holding SPY and not using a hedge fund.
Any fees and losses need to be justified at least to a level that the investor can explain them to other people without looking like a looser and a fool who got screwed by hedge funds.
I’d want to be proud of investing in the right hedge fund, even if I paid 40% in fees (which should not be higher if things are managed properly)

 

[Same Lazy Element]

I don’t believe this, and partially because of you..., because you don’t believe in retail-sourced alpha.

I believe in the ability of retail traders to make money and there are some good examples here. Naturally, there aren't many of these traders here on ET or at large (whatever the 95% failure figure etc) but there enough to have a sample. However, it's reasonable to assume that fraction of pros that make money is higher, simply by virtue of initial selection. People in professional space came through a selection process (good schools, bank or fund apprenticeship, years of beatings by the market at employers dime etc) while on the retail side anyone who has a few grand and an RH account is an instant trader.

So assuming no retail strategies work then it’s hard to believe that only hedge funds would generate alpha, and so many of them.

Retail strategies (i.e. most of the garbage discussed) or retail size? It's much easier to generate good returns on retail scale if you know what you are doing. Most people I know who came through the industry and now are trading retail (let's say 500k to 5 million account) are doing very well, FWIW.

This is not exactly what I think, just arguing the point in terms of retail trading, but I do think that realistically less than 15% hedge funds could even justify their existence. And less than 5% can offer substantial value where investors wouldn’t be concerned about investing (vs being afraid of uncontrolled risks).

It's a tricky metric. In terms of returns on gross AUM, I think 5%, possibly even less, is about right as AUM naturally aggregates in the large funds that mostly peddle beta. In terms of per-fund, I'd stand by my one in 5 figure. There is a lot of specialized knowledge out there that can not be exploited at scale, from commodities trading to some specialized arbitrages. So there are a lot of small funds that are doing fairly well and mostly become useless once they hit a certain AUM threshold.

 

[Same Lazy Element]

Losing years are acceptable if an investor manages not to look like a sucker who ended up making 10% total over 10 years (1% per year) while everyone else doubled their money by holding SPY and not using a hedge fund.

Not really, though. There is a strong tendency in people to overweigh recent observations (i.e. 10 year bull run) and forget how it felt to hold an underwater passive investment. People who were holding SPYs from mid 2000 to mid 2011-2012 (i am too lazy to do any TR calculations) did not make anything.

 

[guru]

I believe in the ability of retail traders to make money and there are some good examples here. Naturally, there aren't many of these traders here on ET or at large (whatever the 95% failure figure etc) but there enough to have a sample. However, it's reasonable to assume that fraction of pros that make money is higher, simply by virtue of initial selection. People in professional space came through a selection process (good schools, bank or fund apprenticeship, years of beatings by the market at employers dime etc) while on the retail side anyone who has a few grand and an RH account is an instant trader.


Retail strategies (i.e. most of the garbage discussed) or retail size? It's much easier to generate good returns on retail scale if you know what you are doing. Most people I know who came through the industry and now are trading retail (let's say 500k to 5 million account) are doing very well, FWIW.


It's a tricky metric. In terms of returns on gross AUM, I think 5%, possibly even less, is about right as AUM naturally aggregates in the large funds that mostly peddle beta. In terms of per-fund, I'd stand by my one in 5 figure. There is a lot of specialized knowledge out there that can not be exploited at scale, from commodities trading to some specialized arbitrages. So there are a lot of small funds that are doing fairly well and mostly become useless once they hit a certain AUM threshold.

Ok cool. I think I saw some of your comment in the past about retail platforms/software that isn’t sufficient to generate alpha, so I might’ve confused it with retail trading in general.
Though I’m also following larger crowd strategy platforms like Quantopian and QuantConnect, and also saw them failing in launching alpha-generating strategies for external investors, basically showing how difficult it is to produce alpha for anyone in the world.
While I appreciate your confirmation that the alpha does exist out there, somewhere...

 

[silvercoin]

You better hold onto your billfold boys.

 

[danielc1]

I have alpha's lying here on the floor, anyone willing to swype it up?