Quote from gnome:
Maybe it's because (1) when "things go well", HFs are scraping off exorbitant fees, and when "things go wrong" (as they often do when management is overly compensated for taking risk), investors are left holding the bag.
Warren Buffett also thinks HFs are immoral rip-offs.
Doesn't this depend entirely on the structure of the fund in question? Since neither you nor the old geezer knows wutang, for all you know he could be charging 0% management fees, 25% of profits in excess of the T-bond yield, and giving investors a 3 year clawback on profits. In which case ALL of your points would not only be totally wrong and ridiculous, they would be the exact opposite of the truth.
Looks like you are just as much of a prejudiced judgemental person as the old guy.
FYI, hedge funds (the decent ones anyway) usually have significant participation by the fund manager, so if investors get hosed then the fund manager does too. Contrast this with mutual funds where significant fund manager participation is very rare. So not only do typical hedge fund managers share the pain of investors, they do so much more than mutual funds. In fact, most hedge fund managers have far more of their net worth in the fund than *any* investor does - they suffer much MORE pain than any investor from losses.
Regarding fees, exorbitant fees are not universal and they are hardly a sole preserve of the hedge fund industry. Real estate agents charge exorbitant fees - 6%. Since when do you or anyone else describe real estate agency as immoral? Mutual funds charge exorbitant fees - some of the I-bank index funds charge 1.5%, about TEN TIMES what Vanguard charge on theirs, for exactly the same product. Show me a single hedge fund which charges ten times the industry benchmark. Besides, investors are well aware of the fees cand choose to pay them of their own free will. If someone is making you 20-30% per annum with less volatility than the S&P, who would begrudge them making 5-6% on top of that? As an investor you still make the lion's share of the profits.
Most hedge fund management fees are to cover staff and premises, they are not a profit centre on the whole. If the fund manager does not perform, he makes no money, simple as that. Even if they are "exorbitant" (i.e. if the fund doesn't beat the market).
As for Buffett, he ran an investment partnership in the 50s and 60s which was basically a long-only equity hedge fund. His fees? 25% of profits above the bond rate. So much for Buffett thinking hedge funds are immoral - he is charging rates just as high as what you call "exorbitant".
It's hard to see how a voluntary arrangement where risks and fees are fully disclosed can be described as immoral. That sobriquet is normally reserved for activities which actually harm people, deceive them, or otherwise infringe their rights or cause them serious hardship. Please explain how a typical hedge fund is guilty of any of these wrongdoings?
