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> There were no fund managers among the 100 richest Americans in 1982. Hedge funds and private equity firms existed in 1982, but none of their founders were ric

> There were no fund managers among the 100 richest Americans in 1982. Hedge funds and private equity firms existed in 1982, but none of their founders were rich enough yet to make it into the top 100. Two things changed: fund managers discovered new ways to generate high returns, and more investors were willing to trust them with their money. PG brushes past this to talk about tech company founders, but I thought this part was actually kind of interesting. Why is there so much money in hedge fund management? My understanding is that their profits come from skimming off the top of the proceeds generated by investing their customers' money. What's stopping hedge fund management firms from racing to the bottom by competing for customers?

cblconfederate 6y ago
> What's stopping hedge fund management firms from racing to the bottom by competing for customers? Regulatory capture.
- missedthecue 6y ago
  What regulations prevent any given firm from offering 1 and 10?
darkwizard42 6y ago
To be fair, nothing stops hedge fund management from doing this. Most funds cannot justify a "2 and 20" fee structure right off the bat. However, there is a certain bias after having some track record of success to charge that fee structure (or more) as a way to signal you are a "big dog" fund to invest in. Does a private university need to have a list price of $75K a year? No, but they do this to signal they are "elite" (even if 80% of their students get financial aid and never pay that list price). Newer funds always start with a lower fee on AUM and sometimes have more creative fees on top of profits. My point on universities is largely grounded in my experience at Carnegie Mellon which acknowledged they were going to just start charging more to make themselves more elite (and while some of that money did go back into making the programs better, a lot did not) and it worked...
nly 6y ago
> What's stopping hedge fund management firms from racing to the bottom by competing for customers? Having money doesn't automatically make you wiser or smarter than the average Joe down the race track. Many wealthy people still believe hedge funds have "the knowledge" or some sort of edge. This is re-enforced by many funds being exclusive to those investing through a financial advisor, or with a minimum amount of capital to invest. Having wealth actually does open doors that Joe with his $50K of life savings can't access. Paying 2 and 20 is indeed less common than it used to be though.
mateo411 6y ago
I think if you want to be a successful hedgefund manager, then you need to beat the market. This means if the market grows by 5%, then the funds capitalization needs to grow by more than 5%. What you are describing is how a bank or more conservative financial investment management firms work. These are the firms that manage mutual funds or sell life insurance.
jessaustin 6y ago
Hedge funds are another group who manage to avoid just taxation. All that "carried interest deduction" crap means a hedge fund manager never pays the top marginal rate, no matter how many millions she socks away.

cblconfederate 6y ago

> What's stopping hedge fund management firms from racing to the bottom by competing for customers? Regulatory capture.

missedthecue 6y ago
What regulations prevent any given firm from offering 1 and 10?

darkwizard42 6y ago

To be fair, nothing stops hedge fund management from doing this. Most funds cannot justify a "2 and 20" fee structure right off the bat. However, there is a certain bias after having some track record of success to charge that fee structure (or more) as a way to signal you are a "big dog" fund to invest in. Does a private university need to have a list price of $75K a year? No, but they do this to signal they are "elite" (even if 80% of their students get financial aid and never pay that list price). Newer funds always start with a lower fee on AUM and sometimes have more creative fees on top of profits. My point on universities is largely grounded in my experience at Carnegie Mellon which acknowledged they were going to just start charging more to make themselves more elite (and while some of that money did go back into making the programs better, a lot did not) and it worked...

nly 6y ago

> What's stopping hedge fund management firms from racing to the bottom by competing for customers? Having money doesn't automatically make you wiser or smarter than the average Joe down the race track. Many wealthy people still believe hedge funds have "the knowledge" or some sort of edge. This is re-enforced by many funds being exclusive to those investing through a financial advisor, or with a minimum amount of capital to invest. Having wealth actually does open doors that Joe with his $50K of life savings can't access. Paying 2 and 20 is indeed less common than it used to be though.

mateo411 6y ago

I think if you want to be a successful hedgefund manager, then you need to beat the market. This means if the market grows by 5%, then the funds capitalization needs to grow by more than 5%. What you are describing is how a bank or more conservative financial investment management firms work. These are the firms that manage mutual funds or sell life insurance.

jessaustin 6y ago

Hedge funds are another group who manage to avoid just taxation. All that "carried interest deduction" crap means a hedge fund manager never pays the top marginal rate, no matter how many millions she socks away.