9 ms·

Hedge Funds Are Pocketing Much of Their Clients' Gains with 'No Limit' Fees

160 points by wslh 2y ago

zusammen 2y ago
[dead]
AutistiCoder 2y ago
[flagged]
- mmlb 2y ago
  No script element zapper can remove it, easy peasy.
asdasdsddd 2y ago
1. Crazy graph format lol 2. I thought management fees were supposed to pay for comp? 3. Buying SPY wins again? 4. I don't really care about rich people getting ripped off, but I wonder if any of my money leaks into these funds
- fallingknife 2y ago
  I've seen plenty of attempts at cramming down multidimensional data into less dimensions, but this is the first time I've ever seen the opposite!
- frenchtoast8 2y ago
  Does this graph format have a name? Google isn’t turning up anything for me.
  - Terr_ 2y ago
    Resembles an unhelpfully simple https://www.amcharts.com/voronoi-treemap/ https://www.amcharts.com/voronoi-treemap/
    - roryokane 2y ago
      Yeah, I was about to post that it looked like some hybrid of a voronoi diagram and a treemap. More about those diagram types that can be combined in this manner: https://en.wikipedia.org/wiki/Voronoi_diagram https://en.wikipedia.org/wiki/Voronoi_diagram https://en.wikipedia.org/wiki/Treemapping https://en.wikipedia.org/wiki/Treemapping
- bberenberg 2y ago
  I think you need to consider time horizons when analyzing these funds. You can buy SPY and it will win. Unless there is a market crash when you hit retirement age, in which case you are screwed until the market recovers. If you don't mind the risk, go 2x levered and you will do even better. [0] Many institutions and HNW and UHNW individuals prioritize consistency over absolute growth. They would rather make 6-8% a year and reduce downside risk than optimize for gains. Multi-strat funds like this one are catering to people who want that product. [0] - https://citeseerx.ist.psu.edu/document?repid=rep1&type=pdf&doi=766305a669c45afbac4b833025529e84ced4a025 https://citeseerx.ist.psu.edu/document?repid=rep1&type=pdf&d...
  - mgfist 2y ago
    2x leaves at the mercy of margin calls, which inconveniently come at the moment where you least want to sell (right after a huge crash). Getting margin called after a 50% crashes leaves you with $0, as an example. A 50% market crash would be brutal even without leverage, but at least no one would force you to sell.
    - unyttigfjelltol 2y ago
      ... "permanently high plateau" and all that...
    - cj 2y ago
      You can achieve 2x leverage without the risk of margin calls by buying ETFs like SPUU (or SPXL, UPRO if you want 3x leverage).
      - casercaramel144 2y ago
        That's a really bad idea, those rebalance daily, so you are basically betting against short-term volatility (if spy goes down 10% in a day then up 10% the next, you are down 1% on spy, on a 2x levered etf you are down 4% or 4x the loss). Also both fees and slippage are really terrible on all levered ETFs If you really want to do 2x lever its probably best to just buy 6 month or 1 yr dated ITM calls. They're quite cheap and very liquid on SPY.
- barbarr 2y ago
  Ok so in defense of their voronoi graphs, if they used a segmented bar or pie chart instead, you wouldn't be able to see the small quantities clearly, and if they used circles of different sizes, it would be easy to mistake the radii as the measured quantity instead of the area. Similar issue arises with lengths/widths if you use rectangles. Their visualization nudges you to compare areas which is a good feature imo.
  - airstrike 2y ago
    Just put regular columns next to each other.
  - fn-mote 2y ago
    > it would be easy to mistake the radii as the measured quantity instead of the area Humans perceive the area as the measured quantity even when radius is the intended, so this isn’t going to be a problem.
  - thaumasiotes 2y ago
    > and if they used circles of different sizes, it would be easy to mistake the radii as the measured quantity instead of the area No, if the measured quantity is represented as the radius, everyone will assume it's the area, and you've designed a very bad graph. If the measured quantity is represented as the area, everyone will assume it's the area, and you're fine. The area is what you can see.
- IncreasePosts 2y ago
  Hedge funds aren't necessarily about getting max gains - they can be about decorrelating some of your investments (hence the hedge). So maybe buying SPY would have worked , but people with their money in hedge funds probably already have a bunch of investments correlated with SPY.
  - Terr_ 2y ago
    > they can be about decorrelating some of your investments (hence the hedge). As a tangential caution to readers: Remember that where you work is something you want to diversify for: Put a bit more into things that won't go bust around the same times you lose your job.
  - clove 2y ago
    That's no longer true and hasn't been for a long time. While the name comes from that concept, the "hedge fund" is now just any fund marketed to accredited investors.
anotherhue 2y ago
Surely there isn't a shortage of competition? Does everyone just want in on the big names?
- tmpz22 2y ago
  Old people who don't watch their assets, very rich people who don't watch their assets. Maybe we should build a protection mechanism for it - maybe call it the Consumer Finance Protection Bureau?
  - deleted 2y ago
    [deleted]
  - metadat 2y ago
    For reference, see: DOGE-Backed Halt at CFPB Comes Amid Musk's Plans for 'X' Digital Wallet - https://news.ycombinator.com/item?id=43003636 https://news.ycombinator.com/item?id=43003636 And The biggest microcode attack in our history is underway - https://news.ycombinator.com/item?id=43001730 https://news.ycombinator.com/item?id=43001730
  - wslh 2y ago
    Automated protection tools could also help in monitoring hedge funds, similar to how apps like BillGuard[1] worked for personal finance. Many investors don’t actively track their holdings the way they do with credit cards. [1] https://en.wikipedia.org/wiki/BillGuard https://en.wikipedia.org/wiki/BillGuard
  - fallingknife 2y ago
    Most investors who invest in these funds are institutions and the ones who are (extremely rich) individuals are very unlikely to not be paying attention.
  - JumpCrisscross 2y ago
    CFPB is irrelevant for hedge fund LPs.
    - 2y ago
yieldcrv 2y ago
I agree that's a problem to be discerning about - and it may be impossible to be discerning about - I also think people are looking for any reason to just "index" and purchase the S&P 500 or VOO ETFs like A) from being ineligible to be in hedge funds, and then B) to justify their fear but hedge fund returns are not able to really be aggregated so simply, there have been attempts, I can pull up whatever article you're probably thinking about, but in real life if you join a hedge fund, you aren't joining a portfolio, your capital is applied to new positions. so every subscription to a hedge fund has unique performance. only people that joined at the exact same time with the same amount of capital have a chance of having the same experience. I think that reality muddies most of the discussion about the concept of hedge funds and investor returns. You should definitely look for the strategy you like, followed by liking the people running the fund.
- ddmitriev 2y ago
  This does not sound right. Maybe venture capital funds work this way? (I wouldn't know about them.) But with regular hedge funds, you are joining a portfolio and you do get the return even on the positions that were in place at the time you invested. The only differences between investors that may affect the return that is allocated to them are a) their share classes, which may affect investment terms such as fees or withdrawal rights, and b) their respective high watermarks, which may affect the payment of performance fees. Everything else within the same fund will be the same.
  - yieldcrv 2y ago
    Sidepockets throw that difference off
mjfl 2y ago
As someone who has worked in the industry: hedge funds are certainly parasites on our society, who make money not from wealthy clients (as is widely thought) but by managing government money through the social security system, union pension funds, college endowments, and sovereign wealth funds. They are a tool to redistribute billions of dollars of ordinary people's money into the pockets of an 'in-group' that then uses the money to buy political influence. I've watched this happen with my own eyes.
- namuol 2y ago
  Any advice to reform things? As individuals or as a collective?
  - mjfl 2y ago
    (1) widespread education and awareness of this phenomenon, (2) put in restrictions on large institutions i.e. the government, unions, universities so that they only invest in funds with 'low-fee' structures and hire professional risk management at the institution-level that hedge risks using more standard methods like mixing bonds and equities and cash. Ban large institutions from investing in private equity, which is a high fee structure built to hide losses over long term periods.
    - JumpCrisscross 2y ago
      I have invested in hedge funds as an individual. Your proposals would be great for me; less competition. I’m sceptical of the public benefits, though there is absolutely a political bloc who will like the optics of banning public investments in HFs and PE. > private equity, which is a high fee structure built to hide losses over long term periods Empirically false. The problem with PE is the same as HFs: fees and dispersion of outcomes.
      - mjfl 2y ago
        by all means, keep letting those charlatans take your money. Are you denying that private equity avoids reporting standards that are mandated for public companies?
neilv 2y ago
It's nice to see that hedge funds are still around. I thought all the bros had switched to tech.
- tombert 2y ago
  I've tried for the last several years to go the other direction: tech -> finance. I've sent thousands of applications to hundreds of trading and finance companies, and gotten zero bites in the last two years. I am currently just assuming that there aren't as many finance jobs as there are jobs at big tech.
  - mhh__ 2y ago
    There aren't.
  - edm0nd 2y ago
    You probably gotta have some wild AI and Quant skills on your resume to get any sort of response.
    - tombert 2y ago
      I was trying to get into the more software-engineering side (e.g. stuff like what Jane Street advertises). I have plenty of experience at BigCo tech companies, but that doesn't appear to be enough. I'm not bitter about it or anything, I'm not entitled to a yuppie finance job, but thus far no luck with it. There might be some magical configuration of my resume to make it stand out better to these companies, but I haven't found it yet if there is.
    - affyboi 2y ago
      I don’t think it has to be that crazy. I only have a Bachelors in CS.
  - moron4hire 2y ago
    I'm just assuming nobody is actually responding to job applications in any industry anymore.
barumrho 2y ago
Shouldn't this problem self-regulate, though? Ultimately, investors mainly care about the returns and if you can get better returns elsewhere due to these fees, they will switch. If they can charge large amount of fees and still stay competitive, then good on them, right?
- financetechbro 2y ago
  Perhaps. But HF capital is usually locked down for a few years. So there is some friction to switching
  - ptero 2y ago
    True, but I believe (although last explored this question a long time ago) that the majority of the capital is not locked.
    - financetechbro 2y ago
      Quick search shows current lock ups range from 6mo to 2yr. There are also some funds that have withdraw limits and short windows for doing so (I.e. once a quarter perhaps), but of course these tighter restrictions are only relevant for the funds that have the clout to implement them
- jfengel 2y ago
  There's a lot of friction. You won't switch based on one year, which would just leave you chasing last year's lucky winner (who will likely revert to the median next year). It takes a long time to realize that your hedge fund is a loser. The whole point of a hedge fund is for you to let someone else do the worrying. So the market is decidedly inefficient.
  - chii 2y ago
    > It takes a long time to realize that your hedge fund is a loser. it's been many decades since the existence of statistical analysis of hedge funds (as an aggregate) that demonstrates their lack of edge over benchmark passive index funds. Some hedge funds would still out-perform. Most don't, and those who do tend to charge fees up to their level of edge, and leave only index-benchmark returns for their investors. If you don't heed this evidence now, you deserve to lose money to these funds.
thrill 2y ago
Hedge funds are entirely voluntary transactions on the part of participants.
- chris_va 2y ago
  Doesn't mean said participants can't get together and complain about it to try and improve market liquidity
  - usefulcat 2y ago
    How is market liquidity relevant here?
    - chris_va 2y ago
      HFs are not very liquid, which makes it easier for managers to charge fees without losing their book of business.
calmbonsai 2y ago
Slow news day Bloomberg? Seriously, if you're investing in ANYTHING, and don't understand the prospectus or won't hire people to understand it for you, you're a fool. They can charge whatever they want on these "pass-throughs". The industry, just like post-return-management-clawbacks in the Tiger era (see Mallaby's "More Money Than God" https://amzn.com/dp/B003SNJZ3Y https://amzn.com/dp/B003SNJZ3Y ) can get away with this precisely ONCE before "normalization" (as much as it's ever normalized) kicks in and these practices obviated.
randomcarbloke 2y ago
whatever happened to 2 and 20?
monkeydust 2y ago
I think a few years ago it was all about longer lock-ins, now pass-throughs ...i mean come on its about as close to a setup as you can get!
JamesVU2000 2y ago
Hedges only make sense if the cure is not worse than the disease. Portfolios are littered with bad hedges

160 points by wslh 2y ago

zusammen 2y ago

[dead]

AutistiCoder 2y ago

[flagged]

mmlb 2y ago
No script element zapper can remove it, easy peasy.

asdasdsddd 2y ago

1. Crazy graph format lol 2. I thought management fees were supposed to pay for comp? 3. Buying SPY wins again? 4. I don't really care about rich people getting ripped off, but I wonder if any of my money leaks into these funds

fallingknife 2y ago
I've seen plenty of attempts at cramming down multidimensional data into less dimensions, but this is the first time I've ever seen the opposite!
frenchtoast8 2y ago
Does this graph format have a name? Google isn’t turning up anything for me.
- Terr_ 2y ago
  Resembles an unhelpfully simple https://www.amcharts.com/voronoi-treemap/ https://www.amcharts.com/voronoi-treemap/
  - roryokane 2y ago
    Yeah, I was about to post that it looked like some hybrid of a voronoi diagram and a treemap. More about those diagram types that can be combined in this manner: https://en.wikipedia.org/wiki/Voronoi_diagram https://en.wikipedia.org/wiki/Voronoi_diagram https://en.wikipedia.org/wiki/Treemapping https://en.wikipedia.org/wiki/Treemapping
bberenberg 2y ago
I think you need to consider time horizons when analyzing these funds. You can buy SPY and it will win. Unless there is a market crash when you hit retirement age, in which case you are screwed until the market recovers. If you don't mind the risk, go 2x levered and you will do even better. [0] Many institutions and HNW and UHNW individuals prioritize consistency over absolute growth. They would rather make 6-8% a year and reduce downside risk than optimize for gains. Multi-strat funds like this one are catering to people who want that product. [0] - https://citeseerx.ist.psu.edu/document?repid=rep1&type=pdf&doi=766305a669c45afbac4b833025529e84ced4a025 https://citeseerx.ist.psu.edu/document?repid=rep1&type=pdf&d...
- mgfist 2y ago
  2x leaves at the mercy of margin calls, which inconveniently come at the moment where you least want to sell (right after a huge crash). Getting margin called after a 50% crashes leaves you with $0, as an example. A 50% market crash would be brutal even without leverage, but at least no one would force you to sell.
  - unyttigfjelltol 2y ago
    ... "permanently high plateau" and all that...
  - cj 2y ago
    You can achieve 2x leverage without the risk of margin calls by buying ETFs like SPUU (or SPXL, UPRO if you want 3x leverage).
    - casercaramel144 2y ago
      That's a really bad idea, those rebalance daily, so you are basically betting against short-term volatility (if spy goes down 10% in a day then up 10% the next, you are down 1% on spy, on a 2x levered etf you are down 4% or 4x the loss). Also both fees and slippage are really terrible on all levered ETFs If you really want to do 2x lever its probably best to just buy 6 month or 1 yr dated ITM calls. They're quite cheap and very liquid on SPY.
barbarr 2y ago
Ok so in defense of their voronoi graphs, if they used a segmented bar or pie chart instead, you wouldn't be able to see the small quantities clearly, and if they used circles of different sizes, it would be easy to mistake the radii as the measured quantity instead of the area. Similar issue arises with lengths/widths if you use rectangles. Their visualization nudges you to compare areas which is a good feature imo.
- airstrike 2y ago
  Just put regular columns next to each other.
- fn-mote 2y ago
  > it would be easy to mistake the radii as the measured quantity instead of the area Humans perceive the area as the measured quantity even when radius is the intended, so this isn’t going to be a problem.
- thaumasiotes 2y ago
  > and if they used circles of different sizes, it would be easy to mistake the radii as the measured quantity instead of the area No, if the measured quantity is represented as the radius, everyone will assume it's the area, and you've designed a very bad graph. If the measured quantity is represented as the area, everyone will assume it's the area, and you're fine. The area is what you can see.
IncreasePosts 2y ago
Hedge funds aren't necessarily about getting max gains - they can be about decorrelating some of your investments (hence the hedge). So maybe buying SPY would have worked , but people with their money in hedge funds probably already have a bunch of investments correlated with SPY.
- Terr_ 2y ago
  > they can be about decorrelating some of your investments (hence the hedge). As a tangential caution to readers: Remember that where you work is something you want to diversify for: Put a bit more into things that won't go bust around the same times you lose your job.
- clove 2y ago
  That's no longer true and hasn't been for a long time. While the name comes from that concept, the "hedge fund" is now just any fund marketed to accredited investors.

anotherhue 2y ago

Surely there isn't a shortage of competition? Does everyone just want in on the big names?

tmpz22 2y ago
Old people who don't watch their assets, very rich people who don't watch their assets. Maybe we should build a protection mechanism for it - maybe call it the Consumer Finance Protection Bureau?
- deleted 2y ago
  [deleted]
- metadat 2y ago
  For reference, see: DOGE-Backed Halt at CFPB Comes Amid Musk's Plans for 'X' Digital Wallet - https://news.ycombinator.com/item?id=43003636 https://news.ycombinator.com/item?id=43003636 And The biggest microcode attack in our history is underway - https://news.ycombinator.com/item?id=43001730 https://news.ycombinator.com/item?id=43001730
- wslh 2y ago
  Automated protection tools could also help in monitoring hedge funds, similar to how apps like BillGuard[1] worked for personal finance. Many investors don’t actively track their holdings the way they do with credit cards. [1] https://en.wikipedia.org/wiki/BillGuard https://en.wikipedia.org/wiki/BillGuard
- fallingknife 2y ago
  Most investors who invest in these funds are institutions and the ones who are (extremely rich) individuals are very unlikely to not be paying attention.
- JumpCrisscross 2y ago
  CFPB is irrelevant for hedge fund LPs.
  - 2y ago

yieldcrv 2y ago

I agree that's a problem to be discerning about - and it may be impossible to be discerning about - I also think people are looking for any reason to just "index" and purchase the S&P 500 or VOO ETFs like A) from being ineligible to be in hedge funds, and then B) to justify their fear but hedge fund returns are not able to really be aggregated so simply, there have been attempts, I can pull up whatever article you're probably thinking about, but in real life if you join a hedge fund, you aren't joining a portfolio, your capital is applied to new positions. so every subscription to a hedge fund has unique performance. only people that joined at the exact same time with the same amount of capital have a chance of having the same experience. I think that reality muddies most of the discussion about the concept of hedge funds and investor returns. You should definitely look for the strategy you like, followed by liking the people running the fund.

ddmitriev 2y ago
This does not sound right. Maybe venture capital funds work this way? (I wouldn't know about them.) But with regular hedge funds, you are joining a portfolio and you do get the return even on the positions that were in place at the time you invested. The only differences between investors that may affect the return that is allocated to them are a) their share classes, which may affect investment terms such as fees or withdrawal rights, and b) their respective high watermarks, which may affect the payment of performance fees. Everything else within the same fund will be the same.
- yieldcrv 2y ago
  Sidepockets throw that difference off

mjfl 2y ago

As someone who has worked in the industry: hedge funds are certainly parasites on our society, who make money not from wealthy clients (as is widely thought) but by managing government money through the social security system, union pension funds, college endowments, and sovereign wealth funds. They are a tool to redistribute billions of dollars of ordinary people's money into the pockets of an 'in-group' that then uses the money to buy political influence. I've watched this happen with my own eyes.

namuol 2y ago
Any advice to reform things? As individuals or as a collective?
- mjfl 2y ago
  (1) widespread education and awareness of this phenomenon, (2) put in restrictions on large institutions i.e. the government, unions, universities so that they only invest in funds with 'low-fee' structures and hire professional risk management at the institution-level that hedge risks using more standard methods like mixing bonds and equities and cash. Ban large institutions from investing in private equity, which is a high fee structure built to hide losses over long term periods.
  - JumpCrisscross 2y ago
    I have invested in hedge funds as an individual. Your proposals would be great for me; less competition. I’m sceptical of the public benefits, though there is absolutely a political bloc who will like the optics of banning public investments in HFs and PE. > private equity, which is a high fee structure built to hide losses over long term periods Empirically false. The problem with PE is the same as HFs: fees and dispersion of outcomes.
    - mjfl 2y ago
      by all means, keep letting those charlatans take your money. Are you denying that private equity avoids reporting standards that are mandated for public companies?

neilv 2y ago

It's nice to see that hedge funds are still around. I thought all the bros had switched to tech.

tombert 2y ago
I've tried for the last several years to go the other direction: tech -> finance. I've sent thousands of applications to hundreds of trading and finance companies, and gotten zero bites in the last two years. I am currently just assuming that there aren't as many finance jobs as there are jobs at big tech.
- mhh__ 2y ago
  There aren't.
- edm0nd 2y ago
  You probably gotta have some wild AI and Quant skills on your resume to get any sort of response.
  - tombert 2y ago
    I was trying to get into the more software-engineering side (e.g. stuff like what Jane Street advertises). I have plenty of experience at BigCo tech companies, but that doesn't appear to be enough. I'm not bitter about it or anything, I'm not entitled to a yuppie finance job, but thus far no luck with it. There might be some magical configuration of my resume to make it stand out better to these companies, but I haven't found it yet if there is.
  - affyboi 2y ago
    I don’t think it has to be that crazy. I only have a Bachelors in CS.
- moron4hire 2y ago
  I'm just assuming nobody is actually responding to job applications in any industry anymore.

barumrho 2y ago

Shouldn't this problem self-regulate, though? Ultimately, investors mainly care about the returns and if you can get better returns elsewhere due to these fees, they will switch. If they can charge large amount of fees and still stay competitive, then good on them, right?

financetechbro 2y ago
Perhaps. But HF capital is usually locked down for a few years. So there is some friction to switching
- ptero 2y ago
  True, but I believe (although last explored this question a long time ago) that the majority of the capital is not locked.
  - financetechbro 2y ago
    Quick search shows current lock ups range from 6mo to 2yr. There are also some funds that have withdraw limits and short windows for doing so (I.e. once a quarter perhaps), but of course these tighter restrictions are only relevant for the funds that have the clout to implement them
jfengel 2y ago
There's a lot of friction. You won't switch based on one year, which would just leave you chasing last year's lucky winner (who will likely revert to the median next year). It takes a long time to realize that your hedge fund is a loser. The whole point of a hedge fund is for you to let someone else do the worrying. So the market is decidedly inefficient.
- chii 2y ago
  > It takes a long time to realize that your hedge fund is a loser. it's been many decades since the existence of statistical analysis of hedge funds (as an aggregate) that demonstrates their lack of edge over benchmark passive index funds. Some hedge funds would still out-perform. Most don't, and those who do tend to charge fees up to their level of edge, and leave only index-benchmark returns for their investors. If you don't heed this evidence now, you deserve to lose money to these funds.

thrill 2y ago

Hedge funds are entirely voluntary transactions on the part of participants.

chris_va 2y ago
Doesn't mean said participants can't get together and complain about it to try and improve market liquidity
- usefulcat 2y ago
  How is market liquidity relevant here?
  - chris_va 2y ago
    HFs are not very liquid, which makes it easier for managers to charge fees without losing their book of business.

calmbonsai 2y ago

Slow news day Bloomberg? Seriously, if you're investing in ANYTHING, and don't understand the prospectus or won't hire people to understand it for you, you're a fool. They can charge whatever they want on these "pass-throughs". The industry, just like post-return-management-clawbacks in the Tiger era (see Mallaby's "More Money Than God" https://amzn.com/dp/B003SNJZ3Y https://amzn.com/dp/B003SNJZ3Y ) can get away with this precisely ONCE before "normalization" (as much as it's ever normalized) kicks in and these practices obviated.

randomcarbloke 2y ago

whatever happened to 2 and 20?

monkeydust 2y ago

I think a few years ago it was all about longer lock-ins, now pass-throughs ...i mean come on its about as close to a setup as you can get!

JamesVU2000 2y ago

Hedges only make sense if the cure is not worse than the disease. Portfolios are littered with bad hedges