That's quite a swing from 50 to 16. I don't see how it can be done in US where the fees to set up are so high. In the end you'd need a super wealthy investor who is locked in for years. And once again, we're in the "who you know" not "what you know" problem.
Underperforming hedge funds getting rich off of fees
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That's quite a swing from 50 to 16. I don't see how it can be done in US where the fees to set up are so high. In the end you'd need a super wealthy investor who is locked in for years. And once again, we're in the "who you know" not "what you know" problem.
Yeah, if you have a smallish newish HF most likely your client/investor partnership agreement is set up for monthly fees and likewise the investor can withdraw his investment at the end of any month. And where it gets awkward is when you go from twenty investors to ten investors - the legal and accounting fees don't drop by 50%.
The other thing is that small HF's will typically take investors from placement agents. And the agents will take the HF Manager's 2% maintenance fee (they do it for at least two years as I recall, not sure) as a typical placement fee.
The other thing is that small HF's will typically take investors from placement agents. And the agents will take the HF Manager's 2% maintenance fee (they do it for at least two years as I recall, not sure) as a typical placement fee.
Your point is completely valid for medium to large funds.
For smaller funds it's not really the case.
If you can catch an experienced trader from a big firm with a great track record (like a John Arnold) who starts his own fund and uses his own capital in the startup it can be a great investment. It's not unlike a venture capital investor in that sense.
If you are running a firm <$250M and you have three really top tier traders that you have to hire - after you pay them the going rate for Portfolio Managers, benefits, the fund's considerable legal and accounting expenses, and your office overhead you are not making a killing on management fees.
For smaller funds it's not really the case.
If you can catch an experienced trader from a big firm with a great track record (like a John Arnold) who starts his own fund and uses his own capital in the startup it can be a great investment. It's not unlike a venture capital investor in that sense.
If you are running a firm <$250M and you have three really top tier traders that you have to hire - after you pay them the going rate for Portfolio Managers, benefits, the fund's considerable legal and accounting expenses, and your office overhead you are not making a killing on management fees.
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If you're a smart investor, want you ideally want is a very good trader with a track record trading big size at a big firm and you want to be in on the ground floor as an angel investor with some minority partnership privileges earned by bringing in other investors. Those are the investors that keep bigger performance percentages and make the newer investors that come later take a smaller performance percentage.
As a Fund Manager, the investors that you absolutely hate are the ones that are with you for five months of positive gains - and they are gone the first down month you have. And unfortunately - if you're a small fund starting out, that's the type of investor you're going to have. There's a big misconception that a Fund Manager with $100M AUM gets a lock on those funds for two years. That is not the case for 99% of those funds.
The only funds that get to put investors into those "gate" arrangements are the big ones. Which in many respects is counterproductive - but that's the way the industry is set up.
When John Arnold left Enron to start up Centaurus he had super massive cred in the Nat Gas trading realm - T. Boone Pickens and other notables were start up investors. Executives at Enron waived his non-compete because they wanted to invest with him. Early on he had a considerable down month - and yet George Soros came IN with capital.
As a Fund Manager, the investors that you absolutely hate are the ones that are with you for five months of positive gains - and they are gone the first down month you have. And unfortunately - if you're a small fund starting out, that's the type of investor you're going to have. There's a big misconception that a Fund Manager with $100M AUM gets a lock on those funds for two years. That is not the case for 99% of those funds.
The only funds that get to put investors into those "gate" arrangements are the big ones. Which in many respects is counterproductive - but that's the way the industry is set up.
When John Arnold left Enron to start up Centaurus he had super massive cred in the Nat Gas trading realm - T. Boone Pickens and other notables were start up investors. Executives at Enron waived his non-compete because they wanted to invest with him. Early on he had a considerable down month - and yet George Soros came IN with capital.
Most of those who don't invest in hedge funds don't seem to grasp the idea that most of the foundation/HNW/Family Office investors in hedge funds aren't nearly as concerned about absolute returns as they are about correlations. If you can get the right correlations relative to the rest of your portfolio it increases your risk adjusted returns even if the instrument you added underperforms the market.
As a result of this misunderstanding, these folks are judging the funds based on a performance goal that neither the fund nor their investors are targeting or really care about. And then wondering why these investors continue to invest in these funds. If anyone's interested, a quick read on MPT will at least provide you an understanding of the mindset of hedge fund investors and hence what they're looking for in hedge fund performance.
As a result of this misunderstanding, these folks are judging the funds based on a performance goal that neither the fund nor their investors are targeting or really care about. And then wondering why these investors continue to invest in these funds. If anyone's interested, a quick read on MPT will at least provide you an understanding of the mindset of hedge fund investors and hence what they're looking for in hedge fund performance.
Great points as usual, Sig.
The other salient point is that Hedge Fund Research, for whom Bloomberg and other media companies use as a reference - doesn't even bother tracking Hedge Funds with less than $500M AUM. I tried to do a deep dive into their data, and of course it's a subscription service with an extraordinary price tag.
The other salient point is that Hedge Fund Research, for whom Bloomberg and other media companies use as a reference - doesn't even bother tracking Hedge Funds with less than $500M AUM. I tried to do a deep dive into their data, and of course it's a subscription service with an extraordinary price tag.
Also good points about the bifurcation of small vs large funds. I personally don't know how anyone under $50M AUM manages to make any money. Not only do they have all the fixed costs to amortize but my understanding is that none of them are able to demand anything close to 2/20.
I have no idea how hedge funds attract so much money.
Rich people must be dumb.
The irony.
Rich people must be dumb.
The irony.