We are talking about hedge funds here, not mutual funds. Most hedge fund owners or portfolio managers are heavily invested (significant fraction of their net worth) in their own fund (though, as one can imagine, there are some tricky bits there like they like to be invested in the least scalable vehicles/strategies).
Hedge funds keep two-thirds of profits
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And where is the proof please?
And what could possibly prevent them from being long and (secretly) short at the same time - risk is zero for them - just to look "fully invested"?
The topic is "Hedge funds keep two-thirds of profits", so it's pretty obvious we are not talking about mutual funds.
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3428165
https://www.hflawreport.com/2540236...closure-duty-to-update-and-verification.thtml
True, according to https://www.institutionalinvestor.c...t-They-re-Also-Less-Likely-to-Take-Your-Money
Hedge Fund Managers With
‘Skin in the Game’
Outperform — But They’re
Also Less Likely to Take Your Money
Hedge fund managers tend to keep funds small when their own capital is at stake, achieving “superior returns” by locking out outside investors.
August 08, 2019
Illustration by II
Hedge fund managers are motivated to perform better when their own money is on the line — to the extent that they will limit investments from outsiders in order to keep returns high, according to a new paper from the National Bureau of Economic Research.
After analyzing the performance and investor characteristics of 720 hedge funds, authors Arpit Gupta and Kunal Sachdeva found that managers tend to invest their own money in their least-scalable strategies — strategies that deliver “superior returns” compared with the firms’ other funds. These high-performing funds are typically open to a limited amount of outside capital, or closed to outside investors completely, according to the findings.
“The consequence of these managerial capital decisions (on both outside and inside capital) is that insider funds substantially outperform — but are offered on a limited basis to outside investors,” Gupta and Sachdeva wrote.
Previous research has shown that raising additional capital tends to dampen a fund’s investment performance — a trend Gupta and Sachdeva said hedge fund managers “internalize” when deciding how to invest their own money. “Personal capital commitments better align the incentives of managers and outsiders, providing greater incentives for managers to scale their funds less aggressively in a manner which results in greater returns to investors — but at the cost of capital participation by outside investors,” they explained.
You Still Need
to Strengthen
Portfolio
Resilience[/paste:font]
[II Deep Dive: Having Skin in the Game Isn’t So Easy Anymore for Private Equity Managers]
One possible cause of higher returns, according to the paper, is that hedge fund managers prioritize those funds that contain more of their personal investments — putting those funds under the charge of their best portfolio managers, for instance.
“An alternate and complementary explanation for the relationship between inside investments and fund performance is that inside investors are simply better informed about managerial ability within the fund family, and they allocate their capital to the better fund managers,” the authors added.
Either way, Gupta and Sachdeva found that a one-standard-deviation increase in investment by the fund’s manager resulted in 1.4 to 1.7 percent in excess returns annually — leading to a boost in performance for those investors who are able to get a piece of the action.
“Some investors are able to co-invest with insiders and earn superior returns due to smaller fund size and the alignment of interests,” Gupta and Sachdeva concluded. “However, the smaller scale of insider funds can have detrimental consequences on other outside investors, who are rationed out of fund participation.”
Because if you already have 50% of your PNW invested in your fund, you not going to have the required liquidity to have reverse exposure. Further, most people would not have the access to the same leverage and products as their fund (so it virtually impossible for them to reverse their exposure in a private account). Finally, it's a massive SEC compliance risk which no sane manager would take.
Some top-line names even use funds closed to outside investors as an advertisement for their less interesting open funds (you can guess who that is). If there is a 4-Sharpe strategy, it's likely to end up in a partner/employee-only vehicle.
Come on, hedging their bets can easily be obtained via options or other leveraged instruments.
And the "documents" you listed do not prove a thing.
Quick example, and I quote: "While such investments [in their own hedge funds] are not legally required, they are a tradition and an expectation among institutional investors."
Oh really? Hmmm....
And think about it for a second, if 50% of the mutual fund owners do not invest a single penny in their own funds, what does this tell us about the rest of this "industry"...?
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I do like the 80s, and I like Lychee Martinis...
Hard to decipher your message. SO MANY ASTERISKS! I feel like Bouchard & Champollion, discovering the Rosetta Stone!
"Worstest": Found a NEW word (possibly used in Atlanta, where I have not been to)!
The Market Wizards:
https://www.optionboost.com/Market_Wizards.pdf
PS. It's hopeless, man.
@Tradex We are shooting fish in a barrell. Btw, "Silence of the Lambs" is on Netflix, truly an incredible film...
Fuck, I wish I had some Lychees & Vodka...
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Hedging what bets? Most funds don't just go "long" or "short", it's a strategy that is pretty involved. For example, do you think you could trade treasury bond basis, CDS or variance swaps in your personal account?
Yeah, really. It's expected and managers do it if they want to raise cash from institutional investors. Some ET denizen that manages to raise a few million from his high school buddies without investing in his own vehicle is not really important for the purposes of this discussion.
Cheerleading for the hedge fund industry is not really a "discussion".
In any case and as a group, money managers cannot even trail the S&P 500:
https://www.cnbc.com/2019/03/15/act...th-year-in-a-row-in-triumph-for-indexing.html
In other words, an index fund performs better than these "actively" managed funds, in the long run (money managers hate this fund, for obvious reasons...)
"My regular recommendation has been a low-cost S&P 500 index fund"
(Warren Buffet)
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