Quote from sle:
Very shortly before I have to dive back
On the hedge fund side, you are making a key mistake in thinking that fund managers actually care about returns (which makes sense, you are a prop trader after all). They mostly don't.
The majority of the large fund mangers only care about the size of AUM. Everyone knows that the way to get rich is to play the long game collecting 2 points on a few yards for years in a row and getting 20% of an occasional punt. Steady returns are simply another way to attract and retain capital, rather then a purpose of the business. Some funds have actually made a (honest) leap and became asset managers rather then funds (e.g. AQR).
Given that the key is raising AUM, simply being a naked seller of convexity is not the way to build a 10bn fund - you'd never pass DD. Instead, everyone wants (and builds) a multi-manager structure and manages it as a basket of options. For a long-term scam, you have to force tight risk limits on your managers and very few of them have room to sell convexity and many of them (especially LS guys) are actually hedging their market exposure.
I'll get to the bank business later.
Actually, you are right about that. And I guess we need to break funds down into more categories. You are right that very large funds have no incentive to kill their golden egg. But I also don't believe they are necessarily buying convexity either. They are more often then not in the more conservative buy and hold crowd with less leverage. Perhaps their "convexity" is coming from the private equity space.
But smaller funds are NOT making anything on their 2%. They need to generate returns and most will bleed to death if they are waiting for a long gamma bet to pay off.
Bankers however get no such management fee. They get to earn a cut of their p&l if they are right and lose nothing if they are wrong. Truly the most blessed among us.