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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 V

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.
- tomkarlo 14y ago
  Lockups can range widely among hedge funds, and can even be different from investors in the same hedge fund when implemented via side letters, with some of the more desirable hedge funds requiring multi-year lockups, especially for side vehicles that invest in less liquid instruments. The two-year period has historical reasons, in that you could avoid certain SEC requirements by setting that as your lockup. Funds also do longer lockups so that they can issue fixed-term debt rather than depending on loans from banks. The percentage of hedge funds fund invested in illiquid investments is generally small... that's something you'd see a PE fund do (buying private companies) but in most cases, a hedge fund does not want to buy something they can't sell with a phone call. Probably the closest would be the distressed guys who might buy untradeable bonds in the hopes of converting or getting a workout. My point was they don't (generally) have the ~7 year effective lockups associated with VC funds, where there's a staged calldown over the first 2-3 years and then you get paid back (hopefully) starting with year 5 or so.

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.
tomkarlo 14y ago
Lockups can range widely among hedge funds, and can even be different from investors in the same hedge fund when implemented via side letters, with some of the more desirable hedge funds requiring multi-year lockups, especially for side vehicles that invest in less liquid instruments. The two-year period has historical reasons, in that you could avoid certain SEC requirements by setting that as your lockup. Funds also do longer lockups so that they can issue fixed-term debt rather than depending on loans from banks. The percentage of hedge funds fund invested in illiquid investments is generally small... that's something you'd see a PE fund do (buying private companies) but in most cases, a hedge fund does not want to buy something they can't sell with a phone call. Probably the closest would be the distressed guys who might buy untradeable bonds in the hopes of converting or getting a workout. My point was they don't (generally) have the ~7 year effective lockups associated with VC funds, where there's a staged calldown over the first 2-3 years and then you get paid back (hopefully) starting with year 5 or so.