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I'll be honest and admit this is one area where hedge funds do get gready. Most funds work on a model of 2 and 20, meaning they take 2% of assets they manage t

I'll be honest and admit this is one area where hedge funds do get gready. Most funds work on a model of 2 and 20, meaning they take 2% of assets they manage to run the fund and then take 20% of the profits as their compensation. This works when you manage 100 million as the 2% can cover most costs, but gets absurd when you manage 100 billion. In cases like this the 2% gets absurdly big and you just can't hire enough people or buy enough tech to eat up this money. It becomes free profit, and that is borderline abuse. The idea with hedge funds originally was, we think we can beat the market and we only get paid when we do, out of the 20% of profits that we take. Essentially we are betting on ourselves and we eat only when we do well, With 2% of 100 billion, it turns out you get paid no matter how well you do. Venture capital funds are equally bad in this regard:( Pension funds need to be better about negotiation fees. EDIT Someone asked me what to look for when investing in a hedge fund. There are really only 3 things: 1) fees, 2 and 20 is standard and if you are investing a "small" amount, less than 20 million, you should expect to pay this. 2) lock up time. Generally you should be able to redeem at the end of any month with 20 days notice, ie if you want to redeem for May 1st, you need to inform them by April 10th. No fund should be able to lock your money up for more than a month, though some will try. There is an exception for this in funds that by definition invest in illiquid assets, such as venture capital or real estate that can take a year or more to mature, but even then 90 days is absolute max you should tolerate. ie if a VC tells you you are locked up for 5 years, and some will, you should tell them thank you and move on. 3) track record. Don't invest in any hedge fund less than 5 years old, unless you have special knowledge or a healthy risk appetite. Its just not worth giving someone else the chance on your dime. Most new funds are started by people leaving a fund and if they are good they get seeded by their previous fund, friends and family. Make them prove themselves before you put yoru money into them.

no_wave 12y ago
4) If you're investing any "small" amount, don't invest it in a hedge fund. Invest it in a passively managed (index) fund. I pay .3% a year on my assets and get market returns.
- vonmoltke 12y ago
  Move over to Vanguard. I pay 0.05% for American stock index funds. In fact, all of their various stock index funds are less than 0.3%.
  - koyote 12y ago
    Put you still end up paying around 0.2%-0.4% in platform costs. Or is this different in the US?
    - mahyarm 12y ago
      The most expensive ETF I use in vanguard is %0.15. Past the expense ratio for the ETFs I pay no fees.
tankenmate 12y ago
Another point is that after fees almost no funds consistently beat VWAP; and for the ones that do you'll either not be invited to invest in it, or it will turn out to be a Madoff. The take away being if you are investing in "normal" equity investment funds at less than $1B invest in index funds, preferably mutual index funds.
- foobarqux 12y ago
  > Another point is that after fees almost no funds consistently beat VWAP VWAP doesn't mean whatever you think it means.
  - tankenmate 12y ago
    VWAP means volume weighted average price. Admittedly in this case I am using the phrase in very very broad terms; to spell it out, very very few managed funds can consistently buy at a lower price than the market as a whole (on any given day, VWAP, as opposed to the opening or closing price which is what is normally published) and consistently sell at a higher price than the market (and hence consistently out perform the market). Once you factor in fees and an outlook of 10+ years the number of funds essentially drops to zero, and most often they give returns below the market average; better to get a return that matches the market, indexed funds, and with very low fees, a mutual index fund.
    - foobarqux 12y ago
      > VWAP means volume weighted average price. Admittedly in this case I am using the phrase in very very broad terms; to spell it out, very very few managed funds can consistently buy at a lower price than the market as a whole and consistently sell at a higher price than the market (and hence consistently out perform the market). Once you factor in fees and an outlook of 10+ years the number of funds essentially drops to zero, and most often they give returns below the market average; better to get a return that matches the market, indexed funds, and with very low fees, a mutual index fund. Unless you are a market maker that isn't how investing works: You are trying to sell higher than you bought in at, not higher than the currently quoted price.
msane 12y ago
The fund in the article is clearly not using 2 and 20. I don't have a big issue with 2 and 20. It is the prerogative of both parties in the contract to come up with a more reasonable number for mega-funds. The issue with this fund is graft and corruption.
- no_wave 12y ago
  If this fund were using 2 and 20 that 2 billion number would be higher - in fact, it would be 15 times higher (160 billion * .02 points * 10 years), and that's not including the 20% fee on gains. 2 and 20 is a sucker's deal. Stay out of hedge funds if possible.
  - limeyx 12y ago
    Dont they have to give back the two when they take the 20 though ?
bko 12y ago
I would also add a condition that the person running the hedge fund has a large portion of his own personal wealth tied up in the fund. Skin in the game is probably the best kind risk management.
- eru 12y ago
  Not necessarily. People are often overly optimistic.
danmaz74 12y ago
> Most funds work on a model of 2 and 20, meaning they take 2% of assets they manage to run the fund and then take 20% of the profits as their compensation. Surely they also deduce 20% of any losses from the 2% fee? /s
foobarqux 12y ago
Virtually no VCs or private equity funds have anything less than a 10 year lockup. Those vehicles can't realistically function without long-term committed capital.
mahyarm 12y ago
I'm surprised that 2 and 20 isn't on a progressive scale. 2 and 20 for the first 20mm, then 1 and 20 for the next 20mm and to keep on reducing the first part of the % point until it's 0 and 20.

no_wave 12y ago

4) If you're investing any "small" amount, don't invest it in a hedge fund. Invest it in a passively managed (index) fund. I pay .3% a year on my assets and get market returns.

vonmoltke 12y ago
Move over to Vanguard. I pay 0.05% for American stock index funds. In fact, all of their various stock index funds are less than 0.3%.
- koyote 12y ago
  Put you still end up paying around 0.2%-0.4% in platform costs. Or is this different in the US?
  - mahyarm 12y ago
    The most expensive ETF I use in vanguard is %0.15. Past the expense ratio for the ETFs I pay no fees.

tankenmate 12y ago

Another point is that after fees almost no funds consistently beat VWAP; and for the ones that do you'll either not be invited to invest in it, or it will turn out to be a Madoff. The take away being if you are investing in "normal" equity investment funds at less than $1B invest in index funds, preferably mutual index funds.

foobarqux 12y ago
> Another point is that after fees almost no funds consistently beat VWAP VWAP doesn't mean whatever you think it means.
- tankenmate 12y ago
  VWAP means volume weighted average price. Admittedly in this case I am using the phrase in very very broad terms; to spell it out, very very few managed funds can consistently buy at a lower price than the market as a whole (on any given day, VWAP, as opposed to the opening or closing price which is what is normally published) and consistently sell at a higher price than the market (and hence consistently out perform the market). Once you factor in fees and an outlook of 10+ years the number of funds essentially drops to zero, and most often they give returns below the market average; better to get a return that matches the market, indexed funds, and with very low fees, a mutual index fund.
  - foobarqux 12y ago
    > VWAP means volume weighted average price. Admittedly in this case I am using the phrase in very very broad terms; to spell it out, very very few managed funds can consistently buy at a lower price than the market as a whole and consistently sell at a higher price than the market (and hence consistently out perform the market). Once you factor in fees and an outlook of 10+ years the number of funds essentially drops to zero, and most often they give returns below the market average; better to get a return that matches the market, indexed funds, and with very low fees, a mutual index fund. Unless you are a market maker that isn't how investing works: You are trying to sell higher than you bought in at, not higher than the currently quoted price.

msane 12y ago

The fund in the article is clearly not using 2 and 20. I don't have a big issue with 2 and 20. It is the prerogative of both parties in the contract to come up with a more reasonable number for mega-funds. The issue with this fund is graft and corruption.

no_wave 12y ago
If this fund were using 2 and 20 that 2 billion number would be higher - in fact, it would be 15 times higher (160 billion * .02 points * 10 years), and that's not including the 20% fee on gains. 2 and 20 is a sucker's deal. Stay out of hedge funds if possible.
- limeyx 12y ago
  Dont they have to give back the two when they take the 20 though ?

bko 12y ago

I would also add a condition that the person running the hedge fund has a large portion of his own personal wealth tied up in the fund. Skin in the game is probably the best kind risk management.

eru 12y ago
Not necessarily. People are often overly optimistic.

danmaz74 12y ago

> Most funds work on a model of 2 and 20, meaning they take 2% of assets they manage to run the fund and then take 20% of the profits as their compensation. Surely they also deduce 20% of any losses from the 2% fee? /s

foobarqux 12y ago

Virtually no VCs or private equity funds have anything less than a 10 year lockup. Those vehicles can't realistically function without long-term committed capital.

mahyarm 12y ago

I'm surprised that 2 and 20 isn't on a progressive scale. 2 and 20 for the first 20mm, then 1 and 20 for the next 20mm and to keep on reducing the first part of the % point until it's 0 and 20.