4 ms·

Though he doesn't suggest it in so many words, I understood him to be proposing that money managers must be paid a flat rate rather than by commission based on

by Harkins 18y ago

Though he doesn't suggest it in so many words, I understood him to be proposing that money managers must be paid a flat rate rather than by commission based on returns or total money managed, that it would remove their incentive to take short-term risks to run up their personal reward.

aikiai 18y ago
He is suggesting that top executive and trader pay be based on the long term performance of the fund. In particular, their own money should be invested in everything they do, and likely also for a number of years after they leave.
- wmorein 18y ago
  One interesting thing to me is that even if you do this (correlate compensation with longer term results) a lot of the same problems still happen. Take, for example, the first big hedge fund blowup: Long Term Capital. Shortly before they blew up, they kicked most of the third party money out of the fund and even levered up their own individual positions (see the book "When Genius Failed"). I'm not saying that misalignment of incentives doesn't play a significant role in a lot of what we are seeing now, but never underestimate hubris.
  - russell 18y ago
    If they hadn't paid out that dividend, LTCM would have had enough in reserves to survive, but no one seems to have learned from that, least of all Alan Greenspan.
  - three14 18y ago
    We can't solve hubris, but perhaps we can highlight it to investors. Funds that too hard to value or are highly leveraged should switch from regulation by the SEC to regulation by state gambling commissions. It would be tricky to find the right cutoff, though, but if an investor would have to travel to a Native American reservation to buy credit default swaps, they might start thinking about whether they really understand what they're investing in.
    - eru 18y ago
      How about the following regulation: No restrictions on what funds can do, no government bailouts, but full disclosure so that clients may impose their own restrictions.
  - Retric 18y ago
    A lot of strange things happen when the players have diffrent amounts of information. EX: Would you bet 1 billion dollars with slightly less than even odds? Well if you don't have a billion dollars then your real risk could be much lower vs. your potential gain. The real question is who would trust you to actually have a billion dollars? That's the real sucker, unless he also lacks a billion dollars.
frig 18y ago
That doesn't work. If I'm paid a flat fee to manage money, the people handing me money to manage are still going to look for the manager with the highest returns (that's human nature). So, I still have an incentive to chase riskier short-term gains; I see less of the upside than if I were also getting a cut of the gains, but the incentives that arise from competition with other money managers remains in place.
- zupatol 18y ago
  I think lots of people are ready to forego higher returns for higher security. That's what I ask from my banker. For a short while I was looking for a bank that would just have a portfolio that follows the market instead of trying to beat it, and that would take less fees because it took less effort to manage. I contacted two other banks, but they didn't have anything like that. I found it was extremely tiring to speak to bankers, they all seem to want to drown you with words. I eventually stayed with my original bank just to stop wasting time.
  - natrius 18y ago
    I thought such things were common? http://en.wikipedia.org/wiki/Index_fund http://en.wikipedia.org/wiki/Index_fund
    - zupatol 18y ago
      They are common. The problems they don't solve is how to allocate the assets between currencies. Also part of my money is in fixed income papers. So even when not trying to beat the market, there are some decisions I would like to leave to a professional.
      - khafra 18y ago
        Dimensional Fund Advisors (http://en.wikipedia.org/wiki/Dimensional_Fund_Advisors http://en.wikipedia.org/wiki/Dimensional_Fund_Advisors) diversify among currencies, markets, and asset classes according to some math I don't really understand. They seem pretty sharp, though, and they're low-load for the buy-and-hold version (they have market timing funds designed to lower the fluctuation at the cost of lowering the long-term return).

by Harkins 18y ago

aikiai 18y ago

He is suggesting that top executive and trader pay be based on the long term performance of the fund. In particular, their own money should be invested in everything they do, and likely also for a number of years after they leave.

wmorein 18y ago
One interesting thing to me is that even if you do this (correlate compensation with longer term results) a lot of the same problems still happen. Take, for example, the first big hedge fund blowup: Long Term Capital. Shortly before they blew up, they kicked most of the third party money out of the fund and even levered up their own individual positions (see the book "When Genius Failed"). I'm not saying that misalignment of incentives doesn't play a significant role in a lot of what we are seeing now, but never underestimate hubris.
- russell 18y ago
  If they hadn't paid out that dividend, LTCM would have had enough in reserves to survive, but no one seems to have learned from that, least of all Alan Greenspan.
- three14 18y ago
  We can't solve hubris, but perhaps we can highlight it to investors. Funds that too hard to value or are highly leveraged should switch from regulation by the SEC to regulation by state gambling commissions. It would be tricky to find the right cutoff, though, but if an investor would have to travel to a Native American reservation to buy credit default swaps, they might start thinking about whether they really understand what they're investing in.
  - eru 18y ago
    How about the following regulation: No restrictions on what funds can do, no government bailouts, but full disclosure so that clients may impose their own restrictions.
- Retric 18y ago
  A lot of strange things happen when the players have diffrent amounts of information. EX: Would you bet 1 billion dollars with slightly less than even odds? Well if you don't have a billion dollars then your real risk could be much lower vs. your potential gain. The real question is who would trust you to actually have a billion dollars? That's the real sucker, unless he also lacks a billion dollars.

frig 18y ago

That doesn't work. If I'm paid a flat fee to manage money, the people handing me money to manage are still going to look for the manager with the highest returns (that's human nature). So, I still have an incentive to chase riskier short-term gains; I see less of the upside than if I were also getting a cut of the gains, but the incentives that arise from competition with other money managers remains in place.

zupatol 18y ago
I think lots of people are ready to forego higher returns for higher security. That's what I ask from my banker. For a short while I was looking for a bank that would just have a portfolio that follows the market instead of trying to beat it, and that would take less fees because it took less effort to manage. I contacted two other banks, but they didn't have anything like that. I found it was extremely tiring to speak to bankers, they all seem to want to drown you with words. I eventually stayed with my original bank just to stop wasting time.
- natrius 18y ago
  I thought such things were common? http://en.wikipedia.org/wiki/Index_fund http://en.wikipedia.org/wiki/Index_fund
  - zupatol 18y ago
    They are common. The problems they don't solve is how to allocate the assets between currencies. Also part of my money is in fixed income papers. So even when not trying to beat the market, there are some decisions I would like to leave to a professional.
    - khafra 18y ago
      Dimensional Fund Advisors (http://en.wikipedia.org/wiki/Dimensional_Fund_Advisors http://en.wikipedia.org/wiki/Dimensional_Fund_Advisors) diversify among currencies, markets, and asset classes according to some math I don't really understand. They seem pretty sharp, though, and they're low-load for the buy-and-hold version (they have market timing funds designed to lower the fluctuation at the cost of lowering the long-term return).