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Interesting points on volatility and the rate environment. I wonder how much is other big picture issues. - The buyers are getting more savvy and don’t want t

Interesting points on volatility and the rate environment. I wonder how much is other big picture issues. - The buyers are getting more savvy and don’t want to pay high fees for whatbthe can do in house. - More high risk money is going to private securities. - For some strategies (derivatives) there are less people to trade with. (Fewer suckers in the game) - Fewer smart people are going into finance. (I’m not sure this has gone on long enough to impact hedge fund startups)

whatok 8y ago
Low vol and rate environment is the primary cause which kinda drives your first two points. Investors aren't allocating as much to alts and what they are is shifting more to PE. PE did well over the last crisis because of long lockups and mark to model vs mark to market. Any hedge fund that invests in public securities doesn't have that luxury to tread water. As far as your first point goes, I don't think investors are getting more savvy but they are under pressure due to bad performance and high fees associated with some of the funds they invested in. Generic long/short equity funds are more or less able to replicate in-house and some are trying out ETFs to sub for other strategies but none of these have the same return profile as the actual strategies.
- mathattack 8y ago
  My impression is a lot of LPs are asking “why am I paying 2/20 or 1.5/15 to get returns that are either 40% correlated to a passive fund, or don’t beat the market?” I think another big issue is that it’s just plain hard to beat the market on a consistent basis.
  - whatok 8y ago
    Yes, agreed but am wary of comparing any proper hedge fund's returns over a short time frame vs the market. They are supposed to be absolute return vehicles. By nature of (supposed) uncorrelated returns, a lot of funds are not going to beat the market if it just goes up and to the right but definitely should be outperforming in other markets.
  - MR4D 8y ago
    You can beat the market in two fundamental ways: 1 - Higher returns 2 - Lower volatility Effectively, everything else is a variation on those two (e.g. same returns with lower volatility; or really low volatility, but better than the AGG; or really high returns with really high volatility (highly leveraged funds) ). The reason this is important is because different investors want different things. If you can beat the AGG at the same or lower volatility after fees, then it doesn't matter how much you charge - people will beat a path to your door. One interesting example is Renaissance Technologies. Several months ago I was reading through their SEC filings, and if IRC, they charge 4 & 40 ! Yes, FOUR and FORTY - to their own employees! For the record, it's a monster fund, and you can't invest in it unless you work there. Yet people will do anything to get a job there and pay those fees because the fund is so good.

whatok 8y ago

Low vol and rate environment is the primary cause which kinda drives your first two points. Investors aren't allocating as much to alts and what they are is shifting more to PE. PE did well over the last crisis because of long lockups and mark to model vs mark to market. Any hedge fund that invests in public securities doesn't have that luxury to tread water. As far as your first point goes, I don't think investors are getting more savvy but they are under pressure due to bad performance and high fees associated with some of the funds they invested in. Generic long/short equity funds are more or less able to replicate in-house and some are trying out ETFs to sub for other strategies but none of these have the same return profile as the actual strategies.

mathattack 8y ago
My impression is a lot of LPs are asking “why am I paying 2/20 or 1.5/15 to get returns that are either 40% correlated to a passive fund, or don’t beat the market?” I think another big issue is that it’s just plain hard to beat the market on a consistent basis.
- whatok 8y ago
  Yes, agreed but am wary of comparing any proper hedge fund's returns over a short time frame vs the market. They are supposed to be absolute return vehicles. By nature of (supposed) uncorrelated returns, a lot of funds are not going to beat the market if it just goes up and to the right but definitely should be outperforming in other markets.
- MR4D 8y ago
  You can beat the market in two fundamental ways: 1 - Higher returns 2 - Lower volatility Effectively, everything else is a variation on those two (e.g. same returns with lower volatility; or really low volatility, but better than the AGG; or really high returns with really high volatility (highly leveraged funds) ). The reason this is important is because different investors want different things. If you can beat the AGG at the same or lower volatility after fees, then it doesn't matter how much you charge - people will beat a path to your door. One interesting example is Renaissance Technologies. Several months ago I was reading through their SEC filings, and if IRC, they charge 4 & 40 ! Yes, FOUR and FORTY - to their own employees! For the record, it's a monster fund, and you can't invest in it unless you work there. Yet people will do anything to get a job there and pay those fees because the fund is so good.