Underperforming hedge funds getting rich off of fees

guru · Jul 13, 2020

https://amp.ft.com/content/ccc72591-4cd8-49e0-9a31-4896742de5dd
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Investors end up paying high fees for poor returns while managers accumulate personal fortunes
Chris Flood and Ortenca Aliaj
July 12, 2020 10:00 am

Paulson & Co and Lansdowne Partners this month decided to shut their flagship hedge funds after periods of disappointing performance that destroyed much of the wealth created by these managers in earlier years.

The erratic performance of many hedge funds means investors can be charged high fees for disappointing returns. But at the same time some hedge fund titans, including John Paulson, still walk awaywith multibillion-dollar personal fortunes.
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(continued at https://amp.ft.com/content/ccc72591-4cd8-49e0-9a31-4896742de5dd )

Millionaire · Jul 13, 2020

No forces anyone to sign up to these terms.

maxinger · Jul 13, 2020

not all hedge fund mangers are doing well.
and they will still get paid.

nothing wrong with that.
no one force you to invest in hedge funds.

virtusa · Jul 13, 2020

Funds are created when the managers think that they can make more money from fees than from trading their own money.
And if the funds make money all the time, they close it or kick out clients to replace them by very close friends.
That's what Jim Simons did with Renaissance.

guru · Jul 13, 2020

The article talks about hedge funds closing because indeed no one forces investors to invest in hedge funds.
I guess the conclusion is that hedge funds will disappear unless they can convince investors that they can provide more value beyond making managers rich.

learner88 · Jul 13, 2020

In the past, hedge funds can be marketed as being exclusively for rich, successful people. Rich people bought it for the snob appeal.

Today, with hedge funds' consistent, persistent underperformance compared to index ETFs which are accessible to all poor retail investors, hedge funds are seen as sucker plays for rich but stupid people. No surprise many hedge funds are closing. A rich man looks stupid if he tells other people he invests in hedge funds, even funds from Renaissance Technologies (except Medallion Fund which is only exclusively for own staff).

No rich man likes to be seen as a sucker who makes other people ultra-rich at his own expense. I think this is the main reason rich clients are fleeing hedge funds ... because of the shame factor.

d08 · Jul 13, 2020

virtusa said:
Funds are created when the managers think that they can make more money from fees than from trading their own money.
And if the funds make money all the time, they close it or kick out clients to replace them by very close friends.
That's what Jim Simons did with Renaissance.

It makes sense though. Why make someone else rich. Most of the hedge fund investors can also afford to lose.

virtusa · Jul 13, 2020

d08 said:
It makes sense though. Why make someone else rich. Most of the hedge fund investors can also afford to lose.

There should only be an incentive fee, no management fee. They should only be paid part of the profit that the client makes.

No profit, no pay.

d08 · Jul 13, 2020

virtusa said:
There should only be an incentive fee, no management fee. They should only be paid part of the profit that the client makes.

No profit, no pay.

I agree. That's how I'd run it. But as said already, people who are very focused on (honest) performance cannot build successful funds. You have to have the right name, went to the right school, know the right people - that's what matters.

bone · Jul 13, 2020

In spirit I agree with you 110%.

The problem is that there are HF investors who go from "hot hand" to "hot hand". Which makes it really hard for a newish smaller fund to keep afloat - even with an above average track record. You don't get to set restrictive investor terms like "withdraw gates" until you have quite a track record.

I have a client who runs a small fund and he went from $50M AUM to $16M AUM this Spring - even though the fund was up something like 34% the first three months of the year and he had a very respectable 2019. Seems like he had clients who just needed the cash to support other failing businesses under crisis.

And that has made it very very difficult for him - it's not cheap to run a HF; especially the legal and accounting.

d08 said:
I agree. That's how I'd run it. But as said already, people who are very focused on (honest) performance cannot build successful funds. You have to have the right name, went to the right school, know the right people - that's what matters.