Hedge funds keep two-thirds of profits

[guru]

https://www.marketwatch.com/story/h...-you-make-money-are-truly-shocking-2020-08-21
=====
...
(based on new study that the National Bureau of Economic Research recently began circulating. Entitled “The Performance of Hedge Fund Performance Fees)
...
The professors analyzed a comprehensive hedge fund database containing nearly 6,000 funds over the 22 years from 1995 through 2016. Over that period these hedge funds collectively produced total gross profits of $316.8 billion. Of this total, fund managers kept $202 billion ($88.7 billion in management fees and $113.3 billion in performance incentive fees). The remainder—$113.3 billion, or 35.8% of total gross profits — went to investors.

The source of this skewed profit sharing is the asymmetry of hedge funds’ performance incentive fees. While the hedge fund industry receives a portion of investors’ gains, it does not to the same extent share in their losses.
...
=====

 

[2rosy]

you don't have to make money to make money. Where are the customer's yachts?

 

[learner88]

It is a shameless way to make money. Nobody respects a person who gets rich at the expense of his customers. Hedge fund managers as a group seem to have succeeded in doing just that.

 

[smallfil]

If you had so much monies, common sense would tell you to just invest the monies yourself and follow the trend. That is easiest way to compound your monies while, minimizing risks. You avoid paying the 2% fees charged by the hedge funds just to get in and the incentive fees. More importantly, keep all the profits for yourself.

 

[Stockboy]

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)

 

[Same Lazy Element]

The professors analyzed a comprehensive hedge fund database containing nearly 6,000 funds over the 22 years from 1995 through 2016. Over that period these hedge funds collectively produced total gross profits of $316.8 billion. Of this total, fund managers kept $202 billion ($88.7 billion in management fees and $113.3 billion in performance incentive fees). The remainder—$113.3 billion, or 35.8% of total gross profits — went to investors.

Yeah, I've read the original paper a little while ago. On one hand, it's pretty biased against the funds which is common in academia (as always, depending on how you slice the data, you can come to different conclusions). On another hand, they are missing several sources of investor underperformance too. Here are some general thoughts in no particular order

- hedge fund performance is inversely correlated with the size of the fund and if you create a dollar-weighted performance metric you invariably going to overweight bigger funds who are de-facto asset managers with inflated fees (e.g. AQR, Ken Fischers whateverthefuckitsname, OZCap etc).

- funds that make it into an HF databases or indices are the heavily marketed and thus their alpha has been diluted significantly. That's especially true in the early stages of hedge fund world when registration did not exists. Because of voluntary nature of these indices and databases, you see a lot of diversion in performance between different sources too.

- there has been growing tendency for managers to close their strategy to investors once they reach capacity. That means, naturally, that anything good is oversubscribed and closed, while junk (de facto beta exposure) is open.

- there is a strong incentive for the manager to do bad things once they hit a certain ratio of AUM vs their own capital (e.g. Malachite and JD Capitals of the world). Over a long enough period this ends up as a big drag on performance.

 

[guru]

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.

You should not run a hedge fund unless you offer great value. Most hedge funds are parasites that attach themselves to their clients by false promises to suck money out of them.
And even the top hedge fund in world, Rentech’s Medallion, charges 36% plus I think a 5% fee, so you may end up paying max 41%, not 64% as above, and with no losses.
And everyone would want to invest with a hedge did that makes them 40%-60%+ every year, and pay 41% of that in fees.
But as we now know, most hedge funds don’t even beat the market, have many years with losses and charge 64%? How can you even justify that?

 

[Same Lazy Element]

Most hedge funds are parasites that attach themselves to their clients by false promises to suck money out of them.

In fairness, that can be said about any entity providing a service at a fee. Don't forget that hedge fund as a concept has almost no barriers to entry - you get all sorts of frauds, ponzi schemes or beta vehicles in the mix. In a way, it's no different from choosing a plumber - picking a bad one will likely result in some leaks.

 

[guru]

Yeah, I've read the original paper a little while ago. On one hand, it's pretty biased against the funds which is common in academia (as always, depending on how you slice the data, you can come to different conclusions). On another hand, they are missing several sources of investor underperformance too. Here are some general thoughts in no particular order

- hedge fund performance is inversely correlated with the size of the fund and if you create a dollar-weighted performance metric you invariably going to overweight bigger funds who are de-facto asset managers with inflated fees (e.g. AQR, Ken Fischers whateverthefuckitsname, OZCap etc).

- funds that make it into an HF databases or indices are the heavily marketed and thus their alpha has been diluted significantly. That's especially true in the early stages of hedge fund world when registration did not exists. Because of voluntary nature of these indices and databases, you see a lot of diversion in performance between different sources too.

- there has been growing tendency for managers to close their strategy to investors once they reach capacity. That means, naturally, that anything good is oversubscribed and closed, while junk (de facto beta exposure) is open.

- there is a strong incentive for the manager to do bad things once they hit a certain ratio of AUM vs their own capital (e.g. Malachite and JD Capitals of the world). Over a long enough period this ends up as a big drag on performance.

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 level of own capital.

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?
We mostly hear about hedge funds that can’t outperform whatever goals and measures they promote. And we hear about investors’ dissatisfaction with fees, which means they don’t get sufficient value out of them.
And if 64% fee is an average, then do some hedge funds charge 90%, I guess by losing most of the money they’ve made during profitable periods?

 

[guru]

In fairness, that can be said about any entity providing a service at a fee. Don't forget that hedge fund as a concept has almost no barriers to entry - you get all sorts of frauds, ponzi schemes or beta vehicles in the mix. In a way, it's no different from choosing a plumber - picking a bad one will likely result in some leaks.

Agree, though occasionally I hear about a good plumber that is still available