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> A large, poorly performing fund (1.5x) pays its GPs dramatically more than a smaller, higher performing (4x) fund. Stunningly, the large fund GPs would earn d

by BLanen 3y ago

> A large, poorly performing fund (1.5x) pays its GPs dramatically more than a smaller, higher performing (4x) fund. Stunningly, the large fund GPs would earn dramatically more on simple management fees alone (i.e. even if the fund was 0x, the GPs earn $200M). Granted, the $1B fund may have more GPs, but the payout differential is eye opening. I've been re-reading this for the last 10 minutes and this is not an explanation for why the large fund would perform worse, which is what I was promised. Is this an incentives argument? The large fund GPs are not incentivized enough because they earn a lot anyway? But their collective performance IS(supposedly, under a meritocracy) the funds returns and they would earn $600 million in carry if they would 4x. This just doesn't explain WHY large funds supposedly do worse than small funds, just that supposedly they do.

ytoawwhra92 3y ago
High return investment opportunities are limited in number and amount of cash which can be deployed into them. As cash under management grows a higher percentage of it gets invested into lower return investment opportunities which are better than risk-free rate, reducing the overall performance of the fund (relative, not absolute). Hypothetical: consider 100 startups each looking for $10m investment. One will return 10x while the others will return 1.5x. A fund with $50m invests in the 10xer and 4 1.5xers, total return is $160m, or 3.2x. A fund with $1,000m invests in all of them, total return is $1,585m, or 1.52x (the max absolute return). Also an incentive issue; suppose the $1,000m fund missed the 10x and instead only made 99 investments, total return is still $1,495m, or 1.495x - very close to max possible in this scenario. Not really fair to compare performance between funds with such dramatic differences in cash under management IMO.
- BLanen 3y ago
  >High return investment opportunities are limited in number and amount of cash which can be deployed into them. As cash under management grows a higher percentage of it gets invested into lower return investment opportunities which are better than risk-free rate, reducing the overall performance of the fund (relative, not absolute). Larger funds supposedly being more risk averse COULD be a reason for less yield but it might as well on average yield MORE. All you said is just hypothetical. And again, the article frames it as an incentives issue, which it isn't. >Not really fair to compare performance between funds with such dramatic differences in cash under management IMO. This literally makes no sense at all. OF COURSE you can compare them and you should. If I have a billion dollars to invest I could invest it all in one fund or I could spread it out of a thousand small funds. It makes no sense to NOT compare them. Is a dollar from a small fund's return different than a large funds? No.
  - ytoawwhra92 3y ago
    > If I have a billion dollars to invest I could invest it all in one fund or I could spread it out of a thousand small funds. Assuming there are 1,000 small funds with an average rate of return higher than the large fund, sure.

by BLanen 3y ago

ytoawwhra92 3y ago

High return investment opportunities are limited in number and amount of cash which can be deployed into them. As cash under management grows a higher percentage of it gets invested into lower return investment opportunities which are better than risk-free rate, reducing the overall performance of the fund (relative, not absolute). Hypothetical: consider 100 startups each looking for $10m investment. One will return 10x while the others will return 1.5x. A fund with $50m invests in the 10xer and 4 1.5xers, total return is $160m, or 3.2x. A fund with $1,000m invests in all of them, total return is $1,585m, or 1.52x (the max absolute return). Also an incentive issue; suppose the $1,000m fund missed the 10x and instead only made 99 investments, total return is still $1,495m, or 1.495x - very close to max possible in this scenario. Not really fair to compare performance between funds with such dramatic differences in cash under management IMO.

BLanen 3y ago
>High return investment opportunities are limited in number and amount of cash which can be deployed into them. As cash under management grows a higher percentage of it gets invested into lower return investment opportunities which are better than risk-free rate, reducing the overall performance of the fund (relative, not absolute). Larger funds supposedly being more risk averse COULD be a reason for less yield but it might as well on average yield MORE. All you said is just hypothetical. And again, the article frames it as an incentives issue, which it isn't. >Not really fair to compare performance between funds with such dramatic differences in cash under management IMO. This literally makes no sense at all. OF COURSE you can compare them and you should. If I have a billion dollars to invest I could invest it all in one fund or I could spread it out of a thousand small funds. It makes no sense to NOT compare them. Is a dollar from a small fund's return different than a large funds? No.
- ytoawwhra92 3y ago
  > If I have a billion dollars to invest I could invest it all in one fund or I could spread it out of a thousand small funds. Assuming there are 1,000 small funds with an average rate of return higher than the large fund, sure.