4 ms·

1% of capital every year is crazy money. If the fund is really that good, they'll take x% of the profits and not charge a fee on capital. You take capital beca

by Hasz 8y ago

1% of capital every year is crazy money. If the fund is really that good, they'll take x% of the profits and not charge a fee on capital. You take capital because you're not really that good, and you don't know (like basically everyone else) what's going to happen. Funds know they can't reliably beat the market, and thus don't offer such structures. I want a ratcheting fee structure. No capital fees, and no fee if the fund loses compared to its benchmark. The fund only makes money if it beats the benchmark.

Bedon292 8y ago
That would be awesome as an investor, but is that actually sustainable? I guess if the benchmark looses money, and they loose less they get to take a % of something? But they you are paying them for having lost money? Seems odd. I think I don't mind a minimum fixed %. Though as you say, 1% is pretty high still.
- mmt 8y ago
  > I guess if the benchmark looses money, and they loose less they get to take a % of something? But they you are paying them for having lost money? Seems odd. I don't see a problem with it. This scenario, like negative interest rates, or negative electric rates [1], may be counterintuitive and seem odd, but it makes sense if you think about it. I'd be paying them for losing less money that I would have otherwise, and "losing less" is just another way of saying "gaining more". [1] Discussed recently on HN in the context of wind turbines in Europe, IIRC
  - Hasz 8y ago
    Hey, just so you know, the link to your resume in the bio is misspelled, leading to a deadlink.
    - mmt 8y ago
      Thanks! Obviously a typo, since the keys are adjacent on a qwerty keyboard, but why I would have ever typed it instead of copy-pasting is beyond me.
jorblumesea 8y ago
It is pretty competitive compared to most other actively managed funds. Hedge funds sometimes take incredible performance fees, advisory fees, etc. They can amount to 2-4% off the top. Not saying I agree with it, but it is well priced for the space.
kgwgk 8y ago
If the fund is really good, they take 2% of the capital and 20% of the profits... (Actually if the fund is really good it's closed to outside investors, so it doesn't really matter.) But of course if a fund is really good it's not just a portfolio of 20 hedge-fund darlings rebalanced quarterly. I don't know how do they select the 20 names from hedge fund filings (looking only at their long positions, as they don't disclose short positions), but it seems that diversification is not one of the criteria. Virtually all of them are tech (IT/Telecom). The 0-20% short (using inverse ETFs! [1]) is inactive, so no hedge at all currently on this overexposed portfolio. If (when) there is a large correction it may not be enough to ensure the loses are lower than for the market even assuming that they do it in time (surely it worked well in the backtests). But hey, it's just 1% and runs (only) on your iPhone! [1] They track the inverse performance well each day but can diverge over longer periods and have other risks that make them not-so-good as hedges. But anyway is just 20% of the long exposure...
- wishart_washy 8y ago
  ^This. It feels like some cheap ML recreating a fund-of-funds with some shorts that limit exposure.
- user5994461 8y ago
  Some well known funds take 30% of profits.
pmart123 8y ago
One newer fee structure to emerge on the endowment side is the 1-or-30 structure, which tries to incentivize managers when they outperform, but also allows managers to keep the lights in an underperforming period. https://www.institutionalinvestor.com/article/b1505qmcspbw8p/new-fee-structure-offers-hope-to-besieged-hedge-funds https://www.institutionalinvestor.com/article/b1505qmcspbw8p... On the retail side, I'm sure using incentive fees is compelling to some potential clients. However, from a compliance perspective, offering a performance-based fee is thought to be operationally difficult. Incentive fee structures with high watermarks or hurdles are not trivial to calculate or grasp. As recently as the 80's, I believe incentive fee structures were outright illegal to offer to non-qualified investors. This is why fees typically are a percentage of assets.
ac29 8y ago
There's are plenty of long-short ETF's with much lower fees as well, if one really wants to get into hedge-fund style investment. I personally wouldn't go for it at any price, but if you want to, there's no reason to overpay.
sseveran 8y ago
I think you are misunderstanding what many (maybe most) funds actually say they are offering. The investment is often positioned as an asset class with low correlation to other asset classes. Whether they actually offer this or not is a different story but many funds are not out promising to beat the S&P 500 every year. Indeed if you look at something like REIF from RenTech they are trying to offer lower volatility than investing the index itself. It should be noted that many (if not all) investors in hedge funds already own significant diversified stock holdings. They likely already own other asset classes with less correlation to the stock market like certain types of real estate. Just to pick a practical example from recent headlines. Elliott Management undoubtedly points out to potential investors that buying sovereign debt and litigating defaults has little correlation with the S&P 500. So when is building a truly diversified global portfolio an allocation to hedge funds (or PE or VC) is often looked at through the lens of correlation, and not necessarily absolute return relative to the S&P 500.
- Hasz 8y ago
  Absolutely. Their advertising material points out their performance compared to the S&P500, and makes no mention of correlation. I don't think that this typical benefit of a hedge fund is what they're trying to sell. It seems to be a "beat the market with a shiny app" kind of pitch. Considering they are going after very small investors, I don't think their target customer has much in the way of investments, better yet diversified ones, and probably knows even less about large scale asset management.

by Hasz 8y ago

Bedon292 8y ago

That would be awesome as an investor, but is that actually sustainable? I guess if the benchmark looses money, and they loose less they get to take a % of something? But they you are paying them for having lost money? Seems odd. I think I don't mind a minimum fixed %. Though as you say, 1% is pretty high still.

mmt 8y ago
> I guess if the benchmark looses money, and they loose less they get to take a % of something? But they you are paying them for having lost money? Seems odd. I don't see a problem with it. This scenario, like negative interest rates, or negative electric rates [1], may be counterintuitive and seem odd, but it makes sense if you think about it. I'd be paying them for losing less money that I would have otherwise, and "losing less" is just another way of saying "gaining more". [1] Discussed recently on HN in the context of wind turbines in Europe, IIRC
- Hasz 8y ago
  Hey, just so you know, the link to your resume in the bio is misspelled, leading to a deadlink.
  - mmt 8y ago
    Thanks! Obviously a typo, since the keys are adjacent on a qwerty keyboard, but why I would have ever typed it instead of copy-pasting is beyond me.

jorblumesea 8y ago

It is pretty competitive compared to most other actively managed funds. Hedge funds sometimes take incredible performance fees, advisory fees, etc. They can amount to 2-4% off the top. Not saying I agree with it, but it is well priced for the space.

kgwgk 8y ago

If the fund is really good, they take 2% of the capital and 20% of the profits... (Actually if the fund is really good it's closed to outside investors, so it doesn't really matter.) But of course if a fund is really good it's not just a portfolio of 20 hedge-fund darlings rebalanced quarterly. I don't know how do they select the 20 names from hedge fund filings (looking only at their long positions, as they don't disclose short positions), but it seems that diversification is not one of the criteria. Virtually all of them are tech (IT/Telecom). The 0-20% short (using inverse ETFs! [1]) is inactive, so no hedge at all currently on this overexposed portfolio. If (when) there is a large correction it may not be enough to ensure the loses are lower than for the market even assuming that they do it in time (surely it worked well in the backtests). But hey, it's just 1% and runs (only) on your iPhone! [1] They track the inverse performance well each day but can diverge over longer periods and have other risks that make them not-so-good as hedges. But anyway is just 20% of the long exposure...

wishart_washy 8y ago
^This. It feels like some cheap ML recreating a fund-of-funds with some shorts that limit exposure.
user5994461 8y ago
Some well known funds take 30% of profits.

pmart123 8y ago

One newer fee structure to emerge on the endowment side is the 1-or-30 structure, which tries to incentivize managers when they outperform, but also allows managers to keep the lights in an underperforming period. https://www.institutionalinvestor.com/article/b1505qmcspbw8p/new-fee-structure-offers-hope-to-besieged-hedge-funds https://www.institutionalinvestor.com/article/b1505qmcspbw8p... On the retail side, I'm sure using incentive fees is compelling to some potential clients. However, from a compliance perspective, offering a performance-based fee is thought to be operationally difficult. Incentive fee structures with high watermarks or hurdles are not trivial to calculate or grasp. As recently as the 80's, I believe incentive fee structures were outright illegal to offer to non-qualified investors. This is why fees typically are a percentage of assets.

ac29 8y ago

There's are plenty of long-short ETF's with much lower fees as well, if one really wants to get into hedge-fund style investment. I personally wouldn't go for it at any price, but if you want to, there's no reason to overpay.

sseveran 8y ago

I think you are misunderstanding what many (maybe most) funds actually say they are offering. The investment is often positioned as an asset class with low correlation to other asset classes. Whether they actually offer this or not is a different story but many funds are not out promising to beat the S&P 500 every year. Indeed if you look at something like REIF from RenTech they are trying to offer lower volatility than investing the index itself. It should be noted that many (if not all) investors in hedge funds already own significant diversified stock holdings. They likely already own other asset classes with less correlation to the stock market like certain types of real estate. Just to pick a practical example from recent headlines. Elliott Management undoubtedly points out to potential investors that buying sovereign debt and litigating defaults has little correlation with the S&P 500. So when is building a truly diversified global portfolio an allocation to hedge funds (or PE or VC) is often looked at through the lens of correlation, and not necessarily absolute return relative to the S&P 500.

Hasz 8y ago
Absolutely. Their advertising material points out their performance compared to the S&P500, and makes no mention of correlation. I don't think that this typical benefit of a hedge fund is what they're trying to sell. It seems to be a "beat the market with a shiny app" kind of pitch. Considering they are going after very small investors, I don't think their target customer has much in the way of investments, better yet diversified ones, and probably knows even less about large scale asset management.