4 ms·

You could swap out VC funds with hedge funds and the article would pretty much be the same.

by kyt 14y ago

asanwal 14y ago
Interested to know if you have data to support this. Thanks.
- jstanderfer 14y ago
  Read "The Hedge Fund Mirage" by Simon Lack
  - tomkarlo 14y ago
    I'm not saying that hedge funds are great either. I'm just saying you can't swap one for the other - they're different beasts.
tomkarlo 14y ago
Not really. There's a couple things hedge funds have to deal with that VCs don't - generally, it's easier to track the market value of their portfolios, so they have to show performance on a quarterly or annual basis. Also, the lockups for investors are much shorter (~2 years) so you can get out of an underperforming fund, whereas with a VC you're generally locked in from the start to the end of the fund. (Secondary markets do exist, but at a large discount.)
- robocat 14y ago
  I think kyt's point is that 2%+20% causes the same mis-alignent of incentives for hedge funds.
  - tomkarlo 14y ago
    Maybe, but even the compensation structures behind that 2/20 are wildly different between the two groups. Hedge funds have two things I've never heard of in a VC fund: benchmarks against market returns, and high-water marks. So while the headline of how they are compensated seems similar, the reality of how they get compensated isn't. Also, what a hedge fund does (assuming it's investing in traded securities) is generally far more scalable than what a VC fund does - doubling the size of a hedge fund may just mean doubling the average trade, whereas for a VC it means you have to either double the number of deals per partner or chase deals in a much later stage where round sizes are larger.
    - robocat 14y ago
      "assuming it's investing in traded securities" Which is only a percentage of funds under management. The hedge fund industry invests in wildly diverse sectors, securities etc. VC'S can be treated as just another hedge fund sector. If you can't get basic facts right (e.g.: lockups are not ~2 year - corrected by mdda), it is difficult to pay any attention to your opinions. The other major problems arising out of "black box" investing also applies to hedge funds.
      - robocat 14y ago
        If you want to continue the thread, back i up with data. E.g. Deutsche Bank's Alternative Investment Survey: http://www.db.com/medien/en/downloads/2008_Alternative_Investment_Survey.pdf http://www.db.com/medien/en/downloads/2008_Alternative_Inves... That shows the diversity of strategies (although not funds managed per investment category). "The SEC started regulating funds with less than a two year lockup" I.e. a pecularity to the US.
        tomkarlo 14y ago
        Effectively, SEC regulations like Dodd-Frank impact large funds worldwide, because you're subject to them if you have more than a small number of US investors. (I think it's 15.) That survey isn't particularly good data. For one thing, it conflates Fund of Funds with other hedge funds, which is pretty questionable given that they're really a separate class with different fee and performance expectations.
        robocat 14y ago
        > That survey isn't particularly good data. For one thing, it conflates Fund of Funds with other hedge funds, which is pretty questionable given that they're really a separate class with different fee and performance expectations. DeutscheBank is a bunch of kids and that particular report is questionable??? I hope you don't work in funds management. > Effectively, SEC regulations like Dodd-Frank impact large funds worldwide, because you're subject to them if you have more than a small number of US investors. (I think it's 15.) See http://www.google.com/?q=master+feeder http://www.google.com/?q=master+feeder. Hedge funds that want to accept money from US and EU investors are structured to avoid the US regulations for the EU investors (for many more reasons than lock-up periods - e.g. look at the graphs of lockup periods broken down by investor country???!). It is almost the defining feature of hedge funds that every fund is different. A hedge fund is defined by the class of investor it aims at (institutional and/or qualified investors) - everything else is variable - hedge funds are diverse in almost all other dimensions (although some things are common e.g. 2 and 20). Returning back to the original point: "You could swap out VC funds with hedge funds and the article would pretty much be the same." Very true. The variation within the hedge fund industry is more than the variation between a VC fund and any average hedge fund. IMHO 90% of the article applies to hedge fund investors. The issues of the 2% management fee, the human factors of the fund managers, and the issues to do with transparency (black box) are all relevant to many hedge funds. The only reason I am answering you is because I hate seeing the standard misconceptions about hedge funds being promulgated.
- teflonhook 14y ago
  Depends what the hedge fund is investing in. You're assuming its liquid investments with a discernable market price. A hedge fund might invest in CDOs, property, artwork or an antique beenie baby collection.
- mdda 14y ago
  The majority of hedge funds offer quarterly or monthly liquidity (partly because this is what the fund-of-funds industry demanded). However, many hedgefunds have the concept of 'gating' - where if everyone rushes for the door at the same time, the fund can restrict outflows. This is to let them to unwind illiquid investments without causing market disruption (to enable them to treat the people leaving on a fair basis as the people who stay : The portfolio doesn't have to just sell off the liquid positions to satisfy cash withdrawals, leaving tougher ones behind).

You could swap out VC funds with hedge funds and the article would pretty much be the same.

by kyt 14y ago

You could swap out VC funds with hedge funds and the article would pretty much be the same.

asanwal 14y ago

Interested to know if you have data to support this. Thanks.

jstanderfer 14y ago
Read "The Hedge Fund Mirage" by Simon Lack
- tomkarlo 14y ago
  I'm not saying that hedge funds are great either. I'm just saying you can't swap one for the other - they're different beasts.

tomkarlo 14y ago

Not really. There's a couple things hedge funds have to deal with that VCs don't - generally, it's easier to track the market value of their portfolios, so they have to show performance on a quarterly or annual basis. Also, the lockups for investors are much shorter (~2 years) so you can get out of an underperforming fund, whereas with a VC you're generally locked in from the start to the end of the fund. (Secondary markets do exist, but at a large discount.)

robocat 14y ago
I think kyt's point is that 2%+20% causes the same mis-alignent of incentives for hedge funds.
- tomkarlo 14y ago
  Maybe, but even the compensation structures behind that 2/20 are wildly different between the two groups. Hedge funds have two things I've never heard of in a VC fund: benchmarks against market returns, and high-water marks. So while the headline of how they are compensated seems similar, the reality of how they get compensated isn't. Also, what a hedge fund does (assuming it's investing in traded securities) is generally far more scalable than what a VC fund does - doubling the size of a hedge fund may just mean doubling the average trade, whereas for a VC it means you have to either double the number of deals per partner or chase deals in a much later stage where round sizes are larger.
  - robocat 14y ago
    "assuming it's investing in traded securities" Which is only a percentage of funds under management. The hedge fund industry invests in wildly diverse sectors, securities etc. VC'S can be treated as just another hedge fund sector. If you can't get basic facts right (e.g.: lockups are not ~2 year - corrected by mdda), it is difficult to pay any attention to your opinions. The other major problems arising out of "black box" investing also applies to hedge funds.
    - robocat 14y ago
      If you want to continue the thread, back i up with data. E.g. Deutsche Bank's Alternative Investment Survey: http://www.db.com/medien/en/downloads/2008_Alternative_Investment_Survey.pdf http://www.db.com/medien/en/downloads/2008_Alternative_Inves... That shows the diversity of strategies (although not funds managed per investment category). "The SEC started regulating funds with less than a two year lockup" I.e. a pecularity to the US.
      - tomkarlo 14y ago
        Effectively, SEC regulations like Dodd-Frank impact large funds worldwide, because you're subject to them if you have more than a small number of US investors. (I think it's 15.) That survey isn't particularly good data. For one thing, it conflates Fund of Funds with other hedge funds, which is pretty questionable given that they're really a separate class with different fee and performance expectations.
        robocat 14y ago
        > That survey isn't particularly good data. For one thing, it conflates Fund of Funds with other hedge funds, which is pretty questionable given that they're really a separate class with different fee and performance expectations. DeutscheBank is a bunch of kids and that particular report is questionable??? I hope you don't work in funds management. > Effectively, SEC regulations like Dodd-Frank impact large funds worldwide, because you're subject to them if you have more than a small number of US investors. (I think it's 15.) See http://www.google.com/?q=master+feeder http://www.google.com/?q=master+feeder. Hedge funds that want to accept money from US and EU investors are structured to avoid the US regulations for the EU investors (for many more reasons than lock-up periods - e.g. look at the graphs of lockup periods broken down by investor country???!). It is almost the defining feature of hedge funds that every fund is different. A hedge fund is defined by the class of investor it aims at (institutional and/or qualified investors) - everything else is variable - hedge funds are diverse in almost all other dimensions (although some things are common e.g. 2 and 20). Returning back to the original point: "You could swap out VC funds with hedge funds and the article would pretty much be the same." Very true. The variation within the hedge fund industry is more than the variation between a VC fund and any average hedge fund. IMHO 90% of the article applies to hedge fund investors. The issues of the 2% management fee, the human factors of the fund managers, and the issues to do with transparency (black box) are all relevant to many hedge funds. The only reason I am answering you is because I hate seeing the standard misconceptions about hedge funds being promulgated.
teflonhook 14y ago
Depends what the hedge fund is investing in. You're assuming its liquid investments with a discernable market price. A hedge fund might invest in CDOs, property, artwork or an antique beenie baby collection.
mdda 14y ago
The majority of hedge funds offer quarterly or monthly liquidity (partly because this is what the fund-of-funds industry demanded). However, many hedgefunds have the concept of 'gating' - where if everyone rushes for the door at the same time, the fund can restrict outflows. This is to let them to unwind illiquid investments without causing market disruption (to enable them to treat the people leaving on a fair basis as the people who stay : The portfolio doesn't have to just sell off the liquid positions to satisfy cash withdrawals, leaving tougher ones behind).