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New York Discovers Wall Street Charges Fees

218 points by dsri 12y ago

rodgerd 12y ago
> In a competitive market for investment performance, managers should charge fees equal to their outperformance. Then what's the value in a fund manager instead of a simple algorithm that follows the market? Would you hire an employee and pay them the entirety of the value they generate for your business? What a preposterous argument.
- pbreit 12y ago
  A lot of people value being able to hold a human responsible.
- morgante 12y ago
  The value is that it's actually quite difficult to follow the market at such huge scale. If you're investing $100 billion and manage to mirror returns of the overall market, you deserve a good commission.
  - dlubarov 12y ago
    Why? If we just want to follow the market, then we only occasionally need to adjust our positions in response to dilution or buyback events, right? Executing large trades efficiently is hard, but with a low turnover it's less of a problem.
  - ville 12y ago
    The Vanguard fund mentioned in the article manages $200 billion assets and mirrors the returns of S&P 500. As mentioned in the comments here its "commission" is 0.02% for investors of the scale we're talking about. How much more than that does one deserve for mirroring the market returns?
- sillysaurus3 12y ago
  It's difficult to follow a market without losing money. I tried once, which was enough to learn that much. The market generally has been growing for a long time, with 2008 being a notable exception. If you've been growing money at market pace, then historically you've been doing pretty well.
  - dlubarov 12y ago
    How come? Wouldn't you have a very low turnover rate since you'd generally only buy during new offerings, and not trade at all in response to valuation changes?
- deleted 12y ago
  [deleted]
- macspoofing 12y ago
  >Then what's the value in a fund manager instead of a simple algorithm that follows the market? Indeed.
- p0ckets 12y ago
  From a link in the article: " By Matt Levine Here is a simple model for hedge fund fees: 1. There are some people who can reliably generate alpha -- returns in excess of the market return -- but those people are rare. 2. It is somewhat difficult to tell who those people are; in particular, at any given time, there are more people who look like they can generate alpha than who actually can. 3. If you are one of the people who can generate alpha, you should charge a fee for your services that is equal to the alpha that you generate. 4. If you are not one of those people, you should charge a fee equal to the alpha that those people generate, because then investors might think that you're one of them. "
  - defen 12y ago
    Ok, so I'll be the guy on the other side of this hypothetical deal. In the scenario he's described, either I get market returns by paying the elite guy to keep his alpha, or I get sub-market returns by paying too much to a guy who isn't actually elite. So, best case scenario I get market returns? Then why not just invest in an index fund?
    - Enzolangellotti 12y ago
      A)Because with 160bln you're the market; B) Change the point of view from the retail investor to the pension fund, funds have a very narrow and constrained mandate, they need to hedge risks and deal with the increasing negative cash-flows. They can't merely park their money somewhere and hope for the best.
    - Lazare 12y ago
      > So, best case scenario I get market returns? Yes. Note: This is a surprisingly accurate description of reality. Aggregate hedge fund returns are goddamn terrible. > Then why not just invest in an index fund? Well, you should, if you're trying to maximise your expected outcome. Of course, not everyone is trying to do that. In particular, what if you run a pension fund which is currently underfunded, but for political reasons is claiming to be adequately funded through the expedient of assuming that future returns will exceed any reasonable expectation of market returns? If you invest in an index fund you'll get market returns; since that's not enough this means you will miss your targets, and be unable to pay promised pensions, at which point you'll be fired. But if you give all the funds cash to a hedge fund, or engage in some crazy snowball derivative[1], then you'll probably do even worse than an index fund, be able to pay an even lower percentage of the promised pensions, and you'll be fired. Which is actually no worse for you. But you MIGHT do really well, and actually be able to pay the promised pensions. Not likely, but if it works you avoid you getting fired, and if it doesn't you were going to be fired anyhow, so why not give it a shot? All of why is completely hypothetical. The fact that many US pensions funds are horribly underfunded using any plausible actuarial projects and are simultaneously investing heavily in exotic asset classes is just a funny coincidence. [1]: http://www.bloombergview.com/articles/2014-05-02/portuguese-train-company-was-run-over-by-a-snowball http://www.bloombergview.com/articles/2014-05-02/portuguese-...
- nattaggart 12y ago
  Even an algorithm has some (although very small) management fee. The cheapest ETFs have an expense ratio of .05%. So from this perspective, it'd make sense to go with the human fund manager who was beating the market and charging exactly his outperformance.
  - cjhopman 12y ago
    Vanguard institutional plus is 0.02%
    - nattaggart 12y ago
      Thanks for the correction. Institutional funds were off my radar but they definitely apply in this case.
aioprisan 12y ago
TL;DR: "So for instance in U.S. equities the funds got annual returns of 8.24 percent for 10 years, versus annual fees for U.S. equities of about 0.08 percent. So the funds got 99 percent of the returns on their investment, and the managers got 1 percent of those returns. Again, paying managers 1 percent of the returns they generate does not seem particularly egregious to me, though I suppose there's an argument the other way." "None of this seems like a blanket reason to condemn "Wall Street," but, you know, politicians gotta politick. My takeaways are something like: 1. New York pension funds' performance is fine. 2. They pay fees that, over all, are quite low. 3. Their alternative investments seem to somewhat outperform public-market benchmarks, though maybe not as much as they'd like."
- astazangasta 12y ago
  Orly? So you're OK with paying an extra 1% above the market rate on your mortgage? Because that's the kind of thing you're talking about. 1% a year will eat quite a lot out of your retirement over 40 years. I.e. 40%.
  - deleted 12y ago
    [deleted]
  - lelandbatey 12y ago
    The fees are 1% on returns not on the "balance" as it where. The total fees as a percent of total invested assets are 0.2% per year.
    - chriogenix 12y ago
      the fee is not on the return its on the balance. so if you make money, they make money. if you lose money they still make money. mutual fund feeds end up being massive over a long period of time which is why financial advisors do so well if they have a big enough asset base
  - lloydde 12y ago
    You had me right up to the 40%. Could you provide the math there? I think the context of the 1% would be 1% of the interest rate, not the principle.
guelo 12y ago
The whole article is premised on the idea that Vanguard's fee is low at 0.17%. But is it really? In a free competitive market fees for algorithmic or mechanical money management would probably be a small flat fee. Vanguard's costs are not proportional to the amount of money under management.
- toomuchtodo 12y ago
  Not sure why you were downvoted, it's true. A market competitor hasn't come out yet with a flat fee structure, but with the FinTech battle heating up between algorithmic advisors I believe its an inevitable product/price offering. A billion dollars buys a lot of developer and data scientist time.
  - infinii 12y ago
    Not only that but does it really take double the effort for an invement manager to manage $100B compared to $50B?
    - toomuchtodo 12y ago
      Investment managers almost never beat an index: http://www.marketwatch.com/story/index-funds-beat-active-90-of-the-time-really-2014-08-01 http://www.marketwatch.com/story/index-funds-beat-active-90-... http://www.marketwatch.com/story/almost-no-one-can-beat-the-market-2013-10-25 http://www.marketwatch.com/story/almost-no-one-can-beat-the-... http://www.theglobeandmail.com/globe-investor/investment-ideas/actively-managed-funds-vs-the-index-once-again-no-contest/article21580578/ http://www.theglobeandmail.com/globe-investor/investment-ide...
      - lionhearted 12y ago
        A couple problems with that -- 1. Studies that say "XX% of active managers don't beat an index" include every tiny poorly managed fund. The best attractive lots of capital; Bridgewater has $169 billion under management and has a long track record of large outperformance. 2. A lot of investors aren't trying to beat the market per se -- that's in your own link. If you own safe investments during a bull market, you underperform... but if it (ideally) makes you less susceptible to both boom and bust, that could be a good trade depending on what you're doing. If you're an insurance company or pension fund, you probably want stability more than squeezing every last basis point out of your investments. Anyway, I could give you many criticisms of many aspects of finance, but I think "index > active management" is a bit simple.
mturmon 12y ago
There has been a series of recent lawsuits that have required pension funds to perform proper due diligence when selecting management for retirement funds. (E.g., http://www.bloomberg.com/news/articles/2015-02-20/lockheed-agrees-to-pay-62-million-to-end-pension-fees-lawsuit http://www.bloomberg.com/news/articles/2015-02-20/lockheed-a... and http://www.retirementtownhall.com/?p=6763 http://www.retirementtownhall.com/?p=6763) The possibility for kickbacks (or just complacency) when the ones selecting the fund managers do not necessarily have significant funds under management is evident. One side effect has been the inclusion of a greater buffet of options for retirement funds offerings from employers. This news story seems to be another side-effect, in which people start to realize how large these fees had been in some cases.
- cmdkeen 12y ago
  Pension funds these days do an awful lot of work to decide how to invest, and who to invest with. They send out RFIs which an awful lot of due diligence questions, have access to independent consultants to advise on active/passive strategies etc. Active managers compete for business, and retaining clients even when performance is good is not easy. One of the key differentiators isn't just performance but client service - if you're investing $40bn of other people's pensions then you want to get good answers from your active investors about their thinking, where they see things going, risks, performance etc. Oh and the best active managers charge relatively low fees, it is very much not a case of "you get what you pay for" - low fees and high assets under management is a much better money making model for everyone.
ForHackernews 12y ago
Alternative title: Financial press publishes financial industry apologia.
hurin 12y ago
So what Mr. Levine is saying here, is that the expense for fund management is expected to scale nearly linearly with fund-size and New Yorkers have nothing to complaint about.
- tsotha 12y ago
  Larger funds do cost more to manage. There's a point at which you have to diversify not to mitigate risk but because large buys drive up the cost of the purchase. Also, there are a whole bunch of extra SEC rules that kick in when you're changing your position in a stock in which you have a nontrivial percentage of outstanding shares.
maxk42 12y ago
> those managers gobbled up more than 95 percent of the value added So they added value above and beyond the benchmark and you're complaining that they expected compensation for this service?
- sukilot 12y ago
  If they underperforming benchmark will they eat the loss?
  - harry8 12y ago
    This. They get a free option, they get upside exposure for zero downside risk. Hell it's even a sweeter deal, they get paid as though they got the upside even if they screw up royally. How did all those funds miss that all those securitized mortgages were junk and not AAA? Just like this. S&P say it's fine so Larry, fancy a round of 18 before our business lunch?
anigbrowl 12y ago
One easy trick: Express it as a 10-year cost, rather than an annual cost, and it sounds 10 times as big! This is an increasing and pernicious trend in political discourse.
- hudibras 12y ago
  Goes right along with expressing costs in Really Big Numbers! without giving context. For example, the $200M/year spent on pension fees is 0.2% of NYC's annual budget of $78B.
  - vijucat 12y ago
    Are you sure that NYC has an annual budget of $78B? That's a humongous number for any city, and an outrageous number for a city with a Subway system that is (supposedly still) in a state of disrepair.
    - cjhopman 12y ago
      It is that high. http://www.nyc.gov/html/omb/downloads/pdf/tech2_15.pdf http://www.nyc.gov/html/omb/downloads/pdf/tech2_15.pdf
    - ceejayoz 12y ago
      That's around $10k/resident (and the city gets immense amount of non-resident visitors). Given things like public schools, transport, fire/police, etc. it doesn't seem particularly high to me.
    - scott_s 12y ago
      "Disrepair" is a strong word. There are problems, but most of the time, it runs smoothly for me. It's an enormous piece of infrastructure that mostly works. That's no small feat.
      - SonicSoul 12y ago
        it's been progressively worse. lately it seems like you have a 60% chance of delays to or from work, and forget about knowing which subway will run on the weekend. http://jalopnik.com/you-are-not-insane-the-new-york-city-subway-is-getting-1687817007 http://jalopnik.com/you-are-not-insane-the-new-york-city-sub...
oh_sigh 12y ago
Why aren't fees capped at some limit? Like...maybe 100 million per year? I'm just curious how much harder it is to manage a $100bn fund vs a $200bn fund. Is it twice as difficult?
- oldmanjay 12y ago
  why does the compensation need to be tied to the difficulty rather than the assets under management? you haven't actually made a case for that, just assumed it was naturally correct. edit: typo
  - jlebar 12y ago
    > why does the compensation need to be tied to the difficulty rather than the assets under management? you haven't actually made a case for that, just assumed it was naturally correct. Because in a competitive market, the price of a good is equal to its marginal cost? "Difficult" here is being used synonymously with "expensive".
    - roel_v 12y ago
      OK, then why do the fund managers don't just move elsewhere? The flaw in your argument is that you assume that investment services are a commodity, which obviously they aren't, otherwise everybody wouldn't have to be frothing about how some managers make better returns than others.
- sumedh 12y ago
  > Is it twice as difficult? You cannot really say its twice as difficult but you can easily say that its more difficult because when you are working with a small amount of money you invest in plenty of small promising companies. When you are working in big money a small profit is not going to affect your results much so you need to find a big fish, its very difficult to find such big fish all the time.
- yummyfajitas 12y ago
  It's definitely more difficult. Let me give you an example. I'm currently running an algo that is giving me returns of about 25-30%/year. I do this as a hobby - I don't generally devote more than 10 hours/week to this. Why doesn't NY just give me their money? Why aren't I the greatest investor ever? The answer is that my algo consists of watching the market and picking off liquidity from the top of the book (typically < 500 shares) when things get unbalanced. Then I passively (for the most part) close my positions a couple of weeks later, very rarely taking liquidity. I made $2k last year on approx $10k in the market. If I put $20k into the strategy I'd be losing money by taking liquidity from deeper in the book. I.e., buying 500 shares might cost me $10/share but buying 1000 shares might cost me $10.10/share. I'd lose another $0.10 closing my positions, and shaving off $0.20 in profit per trade would kill my profits. If I were investing 5-10x as much, phrases like "very rarely taking liquidity" would not even be possible - I'd have to take liquidity and I'd then lose the spread as well. And if I were investing 100x as much, I'd be moving the market and losing even more.
lifeisstillgood 12y ago
This looks simple on the outside - is it really necessary to pay a percentage fee when investing this much money? I would suggest that the number of funds in excess of 100bn in the world must fit in a decent sized auditorium. That makes "Unionisation"'of the market quite possible. One could easily see a situation where all the funds just said "50 m pa or fuck off" So my question to HN is - what is so hard (or not) about making market returns for a fund of this size? I mean the obvious approach seems to buy 100m worth of shares in the top 1000 companies and just hold? Perhaps it is worth not being fully invested all the time? Perhaps just making market is not worth it - but if it is, is the saving in fees compensating?
- dragontamer 12y ago
  > So my question to HN is - what is so hard (or not) about making market returns for a fund of this size? Boggleheads have been asking that question for like 40 years. Vanguard funds (which simply pick the top 500 shares, or all the shares... depending on the fund...) outperform something like 85% of actively managed funds. One theory is that modern markets are extremely efficient, which means that actively managed funds do not provide a benefit over just "trusting the market price" of various things.
  - lifeisstillgood 12y ago
    So, and this is a naive question, why on earth does a Vanguard fund charge a percentage for what seems to be very simple administration (sell 1000000 shares in X, buy 100000 shares in Y, make sure VWAP is good). I mean - if I was a trustee of a million fund let alone billion I would expect to know the baseline level of dumbest simplest possible investing process. That approach seem the simplest.
    - kasey_junk 12y ago
      Larger transactions have higher execution costs. Larger funds have larger transactions. It probably isn't the case that there is a linear correlation between fund -> transaction -> execution cost but it is a close enough approximation that everyone is mostly happy.
lifeisstillgood 12y ago
Would it be sensible for a fund trustee to ask to divide the fund in two - one managed as per usual, one simply invested by an internal hire into a simple market tracker (ie no percentage basis). And see which pays better?
mjfl 12y ago
I used to intern at a quant fund and our biggest clients were always pension and social security funds, which we charged a standard fee for assets managed. This would often be around $200 million - $2 Billion. Not sure if it is new information to people. I always felt slightly fishy about it.
lionhearted 12y ago
Surprisingly good article. I wonder if index funds ever get widespread enough adoption that they start to drive prices of the major indexes up and underperform... maybe it sounds crazy right now since institutional investors don't really go for index funds heavily, but if there's a shift on those parameters I could see it happening. Also, I've started to get more down on index funds as I look into them more. An index that has a weighted average of the stock market is always paying for past performance -- you're going heaviest on the largest market cap stocks always. In an era with both stability and upside for large market capitalization stocks it'll do well... in an era where the best private companies don't IPO until they've ran out most of their growth trajectory and then IPO once they've relatively stabilized, you're going to get hammered, no?
- gd1 12y ago
  As you rightly realise, we can't have a situation where all money is blindly invested in passive index trackers, since everyone will be following the herd and no one will be leading it. If active managers are under-performing, then at some point as passive funds grow we will reach an equilibrium point where they are causing such price distortion that they will produce opportunities for active managers to profit from mispricings, correcting the situation.
- yourapostasy 12y ago
  If you are concerned about weighting too heavily into large cap, CRSP also has small and micro cap indexes. Take a look at their total market index methodology [1], which points you to the small and micro cap sister indexes. Even in FI/RE (financial independence/retire early) and Boglehead circles, there are a low percentage of people with $10M+ investable assets, the level at which tinkering with the kind of optimizations you are pointing out starts to become interesting. I picked CRSP because Vanguard uses them, but indexes like Wilshire's are about the same. Most middle- to upper-middle class individuals with a 2+ decade investment time horizon (which should describe the majority of HN readership) are better served with starting on a relatively vanilla FIRE/Boglehead approach, and fine-tuning with allocations to broad bond/EM/International indexes as they go along and get a feel for their personal risk appetite. The plentiful exceptions are people for whom investing is a hobby, they are good at tracking their own performance, and they have domain knowledge about a specific industry. Small-scale active investment can work, but for the vast majority of people who just want to set aside a comfortable retirement without having to spend a lot of time tinkering with it, I have yet to find a better generic approach than passive index tracking on very broad market indexes, though I'm certainly very open to suggestions. I somewhat doubt passive indexing will ever catch on to the levels you mention due to human nature. Indexing only really works over extremely long time spans, and the data has so far consistently shown most people do not plan that far out for their personal finances. As long as most people are personally responsible for the majority of their retirement finances, I don't expect the consistently-applied delayed gratification a successful indexing strategy requires to cause "too many" people to sit in indexes. I classify that as a "would be a nice problem to have", so I'm not worried even if it somehow comes to pass. [1] http://www.crsp.com/files/Equity-Indexes-Methodology-Guide_0.pdf http://www.crsp.com/files/Equity-Indexes-Methodology-Guide_0...
ringshall 12y ago
Relevant to this discussion is Warren Buffet's 1975 memo to the board of the Washington Post regarding investment strategy for their pension fund. He advised being patient, investing like an owner, and eschewing highly paid money managers. A quote from the memo: "If above-average performance is to be their yard stick, the vast majority of investment managers must fail. Will a few succeed — due to either to chance or skill? Of course. For some intermediate period of years a few are bound to look better than average due to chance — just as would be the case if 1,000 ‘coin managers’ engaged in a coin-flipping contest. There would be some ‘winners’ over a five or 10-flip measurement cycle. (After five flips, you would expect to have 31 with uniformly ‘successful’ records — who, with their oracular abilities confirmed in the crucible of the marketplace, would author pedantic essays on subjects such as pensions.)” At the time of WaPo's sale to Jeff Bezos, the pension fund had a $1b surplus. This article describes the memo, and includes a link to a PDF (thru Scribd): http://fortune.com/2013/08/15/the-1975-buffett-memo-that-saved-wapos-pension/ http://fortune.com/2013/08/15/the-1975-buffett-memo-that-sav...
- wpietri 12y ago
  A point he still believes in. In 2008 he made a million-dollar bet with a highly-paid money manager: http://longbets.org/362/ http://longbets.org/362/ Seven years into the bet, he's way ahead: http://fortune.com/2015/02/03/berkshires-buffett-adds-to-his-lead-in-1-million-bet-with-hedge-fund/ http://fortune.com/2015/02/03/berkshires-buffett-adds-to-his... For those interested in the coin-flipping analysis, I strongly recommend "Fooled by Randomness", which is a smart, passionate, and funny examination of how that problem plays out in the investment industry.
  - wnevets 12y ago
    >I strongly recommend "Fooled by Randomness", Its a really good read and can be applied to life outside of investment.
    - vithlani 12y ago
      I second this. To make it more effective, read every couple of years.
harry8 12y ago
The revenue model for investment managers is an annual wealth tax on their clients no matter how bad the returns! Hell of a way to charge fees, huh? Would we all love it if computer programming services were charged as a percentage of the market cap of the customer who needed the work done! But it's Wall St so everyone just accepts a wealth tax model. Then we take them seriously when they repeat their bullshit when to distract from their wealth destroying fees they scream "HFT" "Short Sellers" "The Frickin' Bogeyman"
wavesounds 12y ago
The biggest sham is that Wall Street has convinced us all that they deserve to paid in percentages! Sure %0.2 doesn't sound like much until you realize its $200 million dollars a year. Why is everyone so afraid of just hiring a few smart economists paying them $200k each salary? Nobody really beats the market over the long term anyway.
- chris_b 12y ago
  Because there are people who will pay those economists a percentage and they would rather work there?
- learnstats2 12y ago
  Because somebody already hired those people for a fixed wage and is smart enough to charge us a percentage for it?
- blueside 12y ago
  The same could be said for real estate agents
wodenokoto 12y ago
I'm a bit confused about what the author means when he says that managers should charge equal to the extra value they add to a portfolio. Why should I hire a manager that beats the market, he he charges the amount he beats the market with? Wouldn't that leave me of the same as simply averaging the market?
- foota 12y ago
  The idea being that in a perfectly competitive market the risk adjusted return for everything should be the same.
- bmelton 12y ago
  Because they aren't charging the amount they beat the market by, they're a percentage of that. In your example, you suggest that you could get $100 by using an index, but instead, you hire a guy who gets you $200 for not using an index, and then charges you the $100, and you're no better off. In the article, you could get $100 by using an index, but instead, you hired a guy who gets you $200, and then charges you a percentage of that, keeping $4 for them to your $196. Do you begrudge them their $4, knowing that you "profited" $96 on the deal? Yeah, the math gets uglier when you realize you're talking about much larger numbers, but the clients, e.g., the pension funds, still came out ahead against the index, even after the managers took their fees.
  - smcl 12y ago
    Take the numbers you've used and switch them around slightly to reflect the NYC pensions situation and you can see why they'd be upset. It's not $4 in fees to an additional $96 returned to the client, it's $2billion in fees versus an additional $40m. Scaled back to your example that'd be like hiring a guy who gets you $200, keeping $98 for your $2.
    - bmelton 12y ago
      That would be incorrect. I just used numbers that weren't reflective of the article. To keep (dumbly) using my simple numbers, while still using their percentages, it would be more like this: You could get $100 by using an index, but instead, you hire a guy who gets you $103 for not using an index, then charge you a $2 fee, leaving you with a "profit" of $1. At the end of the day, the fund recipients still come out ahead, just not as much ahead as if the managers charged no fees. If you can figure out a way to get people to work for free, and do a good job on top of it, then you'll have surely cracked the code (or reinvented slavery). Until then, it's hard for me to demonize a money manager who charged two percent over ten years, even if it was two percent of a very large number.
sfjailbird 12y ago
Really puzzled how this is the top item on the Hacker News front page.
SQL2219 12y ago
This sector is loaded with opportunities to undercut the traditional players.
- Nicholas_C 12y ago
  The problem is you can't just create a startup fund and go in there and take on funds from pension funds by undercutting the establishment. You need loads of expertise, relationships, and a proven track record. And if you have all those things then you are a part of the establishment and already making swell money so there's no point in rocking the boat.
redwood 12y ago
Sad to see how hot the quant subject has become on here. Weakens nyc tech. This always happens when the bull market approaches peak.Suddenly every fund feels special because every fund is a winner.
putzdown 12y ago
"Managers should, on the whole, charge more than the value they add." But wouldn't that, trivially, make every managed fund always and inevitably less desirable than every unmanaged fund (assuming they aren't for other reasons)?
jim_greco 12y ago
Matt Levine does a great job of explaining scaremongering from the media (lately, mostly from the NYTimes) about Wall Street. My favorite is the Goldman Sachs aluminum "scandal" from last year: http://www.bloombergview.com/articles/2014-09-03/the-goldman-sachs-aluminum-conspiracy-lawsuit-is-over http://www.bloombergview.com/articles/2014-09-03/the-goldman... There's a lot of bad stuff that happens in finance, but we shouldn't be whipping out the pitch forks every time someone makes an accusation.
dreamdu5t 12y ago
Why is everyone focused on the fees being charged and not the total idiocy of the city of New York? The real outrage here is New York doesn't seem to know what they're doing with managing pension funds.
greedoshotlast 12y ago
A missing point: It is very common for management fees to follow an 2 and 20 Fee Structure. Meaning they charge a flat 2% to keeps the lights on and pay outrageous salaries. Then above a certain threshold an additional 20% of any profits earned. Why does this matter? IHMO this motivates funds managers to accumulate large AUM (Assets Under Management) to make that 2% larger. The fund manager is less motivated to make good returns since he knows he will still collect that 2%. So it might be better to remove the 2% flat fee and simple charge a percentage on the profits earned. This motivates the fund manager to actually generate returns before he makes a buck. Even if the market is going down he will still be motivated to outperform.

218 points by dsri 12y ago

> In a competitive market for investment performance, managers should charge fees equal to their outperformance. Then what's the value in a fund manager instead of a simple algorithm that follows the market? Would you hire an employee and pay them the entirety of the value they generate for your business? What a preposterous argument.

pbreit 12y ago
A lot of people value being able to hold a human responsible.
morgante 12y ago
The value is that it's actually quite difficult to follow the market at such huge scale. If you're investing $100 billion and manage to mirror returns of the overall market, you deserve a good commission.
- dlubarov 12y ago
  Why? If we just want to follow the market, then we only occasionally need to adjust our positions in response to dilution or buyback events, right? Executing large trades efficiently is hard, but with a low turnover it's less of a problem.
- ville 12y ago
  The Vanguard fund mentioned in the article manages $200 billion assets and mirrors the returns of S&P 500. As mentioned in the comments here its "commission" is 0.02% for investors of the scale we're talking about. How much more than that does one deserve for mirroring the market returns?
sillysaurus3 12y ago
It's difficult to follow a market without losing money. I tried once, which was enough to learn that much. The market generally has been growing for a long time, with 2008 being a notable exception. If you've been growing money at market pace, then historically you've been doing pretty well.
- dlubarov 12y ago
  How come? Wouldn't you have a very low turnover rate since you'd generally only buy during new offerings, and not trade at all in response to valuation changes?
deleted 12y ago
[deleted]
macspoofing 12y ago
>Then what's the value in a fund manager instead of a simple algorithm that follows the market? Indeed.
p0ckets 12y ago
From a link in the article: " By Matt Levine Here is a simple model for hedge fund fees: 1. There are some people who can reliably generate alpha -- returns in excess of the market return -- but those people are rare. 2. It is somewhat difficult to tell who those people are; in particular, at any given time, there are more people who look like they can generate alpha than who actually can. 3. If you are one of the people who can generate alpha, you should charge a fee for your services that is equal to the alpha that you generate. 4. If you are not one of those people, you should charge a fee equal to the alpha that those people generate, because then investors might think that you're one of them. "
- defen 12y ago
  Ok, so I'll be the guy on the other side of this hypothetical deal. In the scenario he's described, either I get market returns by paying the elite guy to keep his alpha, or I get sub-market returns by paying too much to a guy who isn't actually elite. So, best case scenario I get market returns? Then why not just invest in an index fund?
  - Enzolangellotti 12y ago
    A)Because with 160bln you're the market; B) Change the point of view from the retail investor to the pension fund, funds have a very narrow and constrained mandate, they need to hedge risks and deal with the increasing negative cash-flows. They can't merely park their money somewhere and hope for the best.
  - Lazare 12y ago
    > So, best case scenario I get market returns? Yes. Note: This is a surprisingly accurate description of reality. Aggregate hedge fund returns are goddamn terrible. > Then why not just invest in an index fund? Well, you should, if you're trying to maximise your expected outcome. Of course, not everyone is trying to do that. In particular, what if you run a pension fund which is currently underfunded, but for political reasons is claiming to be adequately funded through the expedient of assuming that future returns will exceed any reasonable expectation of market returns? If you invest in an index fund you'll get market returns; since that's not enough this means you will miss your targets, and be unable to pay promised pensions, at which point you'll be fired. But if you give all the funds cash to a hedge fund, or engage in some crazy snowball derivative[1], then you'll probably do even worse than an index fund, be able to pay an even lower percentage of the promised pensions, and you'll be fired. Which is actually no worse for you. But you MIGHT do really well, and actually be able to pay the promised pensions. Not likely, but if it works you avoid you getting fired, and if it doesn't you were going to be fired anyhow, so why not give it a shot? All of why is completely hypothetical. The fact that many US pensions funds are horribly underfunded using any plausible actuarial projects and are simultaneously investing heavily in exotic asset classes is just a funny coincidence. [1]: http://www.bloombergview.com/articles/2014-05-02/portuguese-train-company-was-run-over-by-a-snowball http://www.bloombergview.com/articles/2014-05-02/portuguese-...
nattaggart 12y ago
Even an algorithm has some (although very small) management fee. The cheapest ETFs have an expense ratio of .05%. So from this perspective, it'd make sense to go with the human fund manager who was beating the market and charging exactly his outperformance.
- cjhopman 12y ago
  Vanguard institutional plus is 0.02%
  - nattaggart 12y ago
    Thanks for the correction. Institutional funds were off my radar but they definitely apply in this case.

aioprisan 12y ago

TL;DR: "So for instance in U.S. equities the funds got annual returns of 8.24 percent for 10 years, versus annual fees for U.S. equities of about 0.08 percent. So the funds got 99 percent of the returns on their investment, and the managers got 1 percent of those returns. Again, paying managers 1 percent of the returns they generate does not seem particularly egregious to me, though I suppose there's an argument the other way." "None of this seems like a blanket reason to condemn "Wall Street," but, you know, politicians gotta politick. My takeaways are something like: 1. New York pension funds' performance is fine. 2. They pay fees that, over all, are quite low. 3. Their alternative investments seem to somewhat outperform public-market benchmarks, though maybe not as much as they'd like."

astazangasta 12y ago
Orly? So you're OK with paying an extra 1% above the market rate on your mortgage? Because that's the kind of thing you're talking about. 1% a year will eat quite a lot out of your retirement over 40 years. I.e. 40%.
- deleted 12y ago
  [deleted]
- lelandbatey 12y ago
  The fees are 1% on returns not on the "balance" as it where. The total fees as a percent of total invested assets are 0.2% per year.
  - chriogenix 12y ago
    the fee is not on the return its on the balance. so if you make money, they make money. if you lose money they still make money. mutual fund feeds end up being massive over a long period of time which is why financial advisors do so well if they have a big enough asset base
- lloydde 12y ago
  You had me right up to the 40%. Could you provide the math there? I think the context of the 1% would be 1% of the interest rate, not the principle.

guelo 12y ago

The whole article is premised on the idea that Vanguard's fee is low at 0.17%. But is it really? In a free competitive market fees for algorithmic or mechanical money management would probably be a small flat fee. Vanguard's costs are not proportional to the amount of money under management.

toomuchtodo 12y ago
Not sure why you were downvoted, it's true. A market competitor hasn't come out yet with a flat fee structure, but with the FinTech battle heating up between algorithmic advisors I believe its an inevitable product/price offering. A billion dollars buys a lot of developer and data scientist time.
- infinii 12y ago
  Not only that but does it really take double the effort for an invement manager to manage $100B compared to $50B?
  - toomuchtodo 12y ago
    Investment managers almost never beat an index: http://www.marketwatch.com/story/index-funds-beat-active-90-of-the-time-really-2014-08-01 http://www.marketwatch.com/story/index-funds-beat-active-90-... http://www.marketwatch.com/story/almost-no-one-can-beat-the-market-2013-10-25 http://www.marketwatch.com/story/almost-no-one-can-beat-the-... http://www.theglobeandmail.com/globe-investor/investment-ideas/actively-managed-funds-vs-the-index-once-again-no-contest/article21580578/ http://www.theglobeandmail.com/globe-investor/investment-ide...
    - lionhearted 12y ago
      A couple problems with that -- 1. Studies that say "XX% of active managers don't beat an index" include every tiny poorly managed fund. The best attractive lots of capital; Bridgewater has $169 billion under management and has a long track record of large outperformance. 2. A lot of investors aren't trying to beat the market per se -- that's in your own link. If you own safe investments during a bull market, you underperform... but if it (ideally) makes you less susceptible to both boom and bust, that could be a good trade depending on what you're doing. If you're an insurance company or pension fund, you probably want stability more than squeezing every last basis point out of your investments. Anyway, I could give you many criticisms of many aspects of finance, but I think "index > active management" is a bit simple.

mturmon 12y ago

There has been a series of recent lawsuits that have required pension funds to perform proper due diligence when selecting management for retirement funds. (E.g., http://www.bloomberg.com/news/articles/2015-02-20/lockheed-agrees-to-pay-62-million-to-end-pension-fees-lawsuit http://www.bloomberg.com/news/articles/2015-02-20/lockheed-a... and http://www.retirementtownhall.com/?p=6763 http://www.retirementtownhall.com/?p=6763) The possibility for kickbacks (or just complacency) when the ones selecting the fund managers do not necessarily have significant funds under management is evident. One side effect has been the inclusion of a greater buffet of options for retirement funds offerings from employers. This news story seems to be another side-effect, in which people start to realize how large these fees had been in some cases.

cmdkeen 12y ago
Pension funds these days do an awful lot of work to decide how to invest, and who to invest with. They send out RFIs which an awful lot of due diligence questions, have access to independent consultants to advise on active/passive strategies etc. Active managers compete for business, and retaining clients even when performance is good is not easy. One of the key differentiators isn't just performance but client service - if you're investing $40bn of other people's pensions then you want to get good answers from your active investors about their thinking, where they see things going, risks, performance etc. Oh and the best active managers charge relatively low fees, it is very much not a case of "you get what you pay for" - low fees and high assets under management is a much better money making model for everyone.

ForHackernews 12y ago

Alternative title: Financial press publishes financial industry apologia.

hurin 12y ago

So what Mr. Levine is saying here, is that the expense for fund management is expected to scale nearly linearly with fund-size and New Yorkers have nothing to complaint about.

tsotha 12y ago
Larger funds do cost more to manage. There's a point at which you have to diversify not to mitigate risk but because large buys drive up the cost of the purchase. Also, there are a whole bunch of extra SEC rules that kick in when you're changing your position in a stock in which you have a nontrivial percentage of outstanding shares.

maxk42 12y ago

> those managers gobbled up more than 95 percent of the value added So they added value above and beyond the benchmark and you're complaining that they expected compensation for this service?

sukilot 12y ago
If they underperforming benchmark will they eat the loss?
- harry8 12y ago
  This. They get a free option, they get upside exposure for zero downside risk. Hell it's even a sweeter deal, they get paid as though they got the upside even if they screw up royally. How did all those funds miss that all those securitized mortgages were junk and not AAA? Just like this. S&P say it's fine so Larry, fancy a round of 18 before our business lunch?

anigbrowl 12y ago

One easy trick: Express it as a 10-year cost, rather than an annual cost, and it sounds 10 times as big! This is an increasing and pernicious trend in political discourse.

hudibras 12y ago
Goes right along with expressing costs in Really Big Numbers! without giving context. For example, the $200M/year spent on pension fees is 0.2% of NYC's annual budget of $78B.
- vijucat 12y ago
  Are you sure that NYC has an annual budget of $78B? That's a humongous number for any city, and an outrageous number for a city with a Subway system that is (supposedly still) in a state of disrepair.
  - cjhopman 12y ago
    It is that high. http://www.nyc.gov/html/omb/downloads/pdf/tech2_15.pdf http://www.nyc.gov/html/omb/downloads/pdf/tech2_15.pdf
  - ceejayoz 12y ago
    That's around $10k/resident (and the city gets immense amount of non-resident visitors). Given things like public schools, transport, fire/police, etc. it doesn't seem particularly high to me.
  - scott_s 12y ago
    "Disrepair" is a strong word. There are problems, but most of the time, it runs smoothly for me. It's an enormous piece of infrastructure that mostly works. That's no small feat.
    - SonicSoul 12y ago
      it's been progressively worse. lately it seems like you have a 60% chance of delays to or from work, and forget about knowing which subway will run on the weekend. http://jalopnik.com/you-are-not-insane-the-new-york-city-subway-is-getting-1687817007 http://jalopnik.com/you-are-not-insane-the-new-york-city-sub...

oh_sigh 12y ago

Why aren't fees capped at some limit? Like...maybe 100 million per year? I'm just curious how much harder it is to manage a $100bn fund vs a $200bn fund. Is it twice as difficult?

oldmanjay 12y ago
why does the compensation need to be tied to the difficulty rather than the assets under management? you haven't actually made a case for that, just assumed it was naturally correct. edit: typo
- jlebar 12y ago
  > why does the compensation need to be tied to the difficulty rather than the assets under management? you haven't actually made a case for that, just assumed it was naturally correct. Because in a competitive market, the price of a good is equal to its marginal cost? "Difficult" here is being used synonymously with "expensive".
  - roel_v 12y ago
    OK, then why do the fund managers don't just move elsewhere? The flaw in your argument is that you assume that investment services are a commodity, which obviously they aren't, otherwise everybody wouldn't have to be frothing about how some managers make better returns than others.
sumedh 12y ago
> Is it twice as difficult? You cannot really say its twice as difficult but you can easily say that its more difficult because when you are working with a small amount of money you invest in plenty of small promising companies. When you are working in big money a small profit is not going to affect your results much so you need to find a big fish, its very difficult to find such big fish all the time.
yummyfajitas 12y ago
It's definitely more difficult. Let me give you an example. I'm currently running an algo that is giving me returns of about 25-30%/year. I do this as a hobby - I don't generally devote more than 10 hours/week to this. Why doesn't NY just give me their money? Why aren't I the greatest investor ever? The answer is that my algo consists of watching the market and picking off liquidity from the top of the book (typically < 500 shares) when things get unbalanced. Then I passively (for the most part) close my positions a couple of weeks later, very rarely taking liquidity. I made $2k last year on approx $10k in the market. If I put $20k into the strategy I'd be losing money by taking liquidity from deeper in the book. I.e., buying 500 shares might cost me $10/share but buying 1000 shares might cost me $10.10/share. I'd lose another $0.10 closing my positions, and shaving off $0.20 in profit per trade would kill my profits. If I were investing 5-10x as much, phrases like "very rarely taking liquidity" would not even be possible - I'd have to take liquidity and I'd then lose the spread as well. And if I were investing 100x as much, I'd be moving the market and losing even more.

lifeisstillgood 12y ago

This looks simple on the outside - is it really necessary to pay a percentage fee when investing this much money? I would suggest that the number of funds in excess of 100bn in the world must fit in a decent sized auditorium. That makes "Unionisation"'of the market quite possible. One could easily see a situation where all the funds just said "50 m pa or fuck off" So my question to HN is - what is so hard (or not) about making market returns for a fund of this size? I mean the obvious approach seems to buy 100m worth of shares in the top 1000 companies and just hold? Perhaps it is worth not being fully invested all the time? Perhaps just making market is not worth it - but if it is, is the saving in fees compensating?

dragontamer 12y ago
> So my question to HN is - what is so hard (or not) about making market returns for a fund of this size? Boggleheads have been asking that question for like 40 years. Vanguard funds (which simply pick the top 500 shares, or all the shares... depending on the fund...) outperform something like 85% of actively managed funds. One theory is that modern markets are extremely efficient, which means that actively managed funds do not provide a benefit over just "trusting the market price" of various things.
- lifeisstillgood 12y ago
  So, and this is a naive question, why on earth does a Vanguard fund charge a percentage for what seems to be very simple administration (sell 1000000 shares in X, buy 100000 shares in Y, make sure VWAP is good). I mean - if I was a trustee of a million fund let alone billion I would expect to know the baseline level of dumbest simplest possible investing process. That approach seem the simplest.
  - kasey_junk 12y ago
    Larger transactions have higher execution costs. Larger funds have larger transactions. It probably isn't the case that there is a linear correlation between fund -> transaction -> execution cost but it is a close enough approximation that everyone is mostly happy.

lifeisstillgood 12y ago

Would it be sensible for a fund trustee to ask to divide the fund in two - one managed as per usual, one simply invested by an internal hire into a simple market tracker (ie no percentage basis). And see which pays better?

mjfl 12y ago

I used to intern at a quant fund and our biggest clients were always pension and social security funds, which we charged a standard fee for assets managed. This would often be around $200 million - $2 Billion. Not sure if it is new information to people. I always felt slightly fishy about it.

lionhearted 12y ago

Surprisingly good article. I wonder if index funds ever get widespread enough adoption that they start to drive prices of the major indexes up and underperform... maybe it sounds crazy right now since institutional investors don't really go for index funds heavily, but if there's a shift on those parameters I could see it happening. Also, I've started to get more down on index funds as I look into them more. An index that has a weighted average of the stock market is always paying for past performance -- you're going heaviest on the largest market cap stocks always. In an era with both stability and upside for large market capitalization stocks it'll do well... in an era where the best private companies don't IPO until they've ran out most of their growth trajectory and then IPO once they've relatively stabilized, you're going to get hammered, no?

gd1 12y ago
As you rightly realise, we can't have a situation where all money is blindly invested in passive index trackers, since everyone will be following the herd and no one will be leading it. If active managers are under-performing, then at some point as passive funds grow we will reach an equilibrium point where they are causing such price distortion that they will produce opportunities for active managers to profit from mispricings, correcting the situation.
yourapostasy 12y ago
If you are concerned about weighting too heavily into large cap, CRSP also has small and micro cap indexes. Take a look at their total market index methodology [1], which points you to the small and micro cap sister indexes. Even in FI/RE (financial independence/retire early) and Boglehead circles, there are a low percentage of people with $10M+ investable assets, the level at which tinkering with the kind of optimizations you are pointing out starts to become interesting. I picked CRSP because Vanguard uses them, but indexes like Wilshire's are about the same. Most middle- to upper-middle class individuals with a 2+ decade investment time horizon (which should describe the majority of HN readership) are better served with starting on a relatively vanilla FIRE/Boglehead approach, and fine-tuning with allocations to broad bond/EM/International indexes as they go along and get a feel for their personal risk appetite. The plentiful exceptions are people for whom investing is a hobby, they are good at tracking their own performance, and they have domain knowledge about a specific industry. Small-scale active investment can work, but for the vast majority of people who just want to set aside a comfortable retirement without having to spend a lot of time tinkering with it, I have yet to find a better generic approach than passive index tracking on very broad market indexes, though I'm certainly very open to suggestions. I somewhat doubt passive indexing will ever catch on to the levels you mention due to human nature. Indexing only really works over extremely long time spans, and the data has so far consistently shown most people do not plan that far out for their personal finances. As long as most people are personally responsible for the majority of their retirement finances, I don't expect the consistently-applied delayed gratification a successful indexing strategy requires to cause "too many" people to sit in indexes. I classify that as a "would be a nice problem to have", so I'm not worried even if it somehow comes to pass. [1] http://www.crsp.com/files/Equity-Indexes-Methodology-Guide_0.pdf http://www.crsp.com/files/Equity-Indexes-Methodology-Guide_0...

ringshall 12y ago

Relevant to this discussion is Warren Buffet's 1975 memo to the board of the Washington Post regarding investment strategy for their pension fund. He advised being patient, investing like an owner, and eschewing highly paid money managers. A quote from the memo: "If above-average performance is to be their yard stick, the vast majority of investment managers must fail. Will a few succeed — due to either to chance or skill? Of course. For some intermediate period of years a few are bound to look better than average due to chance — just as would be the case if 1,000 ‘coin managers’ engaged in a coin-flipping contest. There would be some ‘winners’ over a five or 10-flip measurement cycle. (After five flips, you would expect to have 31 with uniformly ‘successful’ records — who, with their oracular abilities confirmed in the crucible of the marketplace, would author pedantic essays on subjects such as pensions.)” At the time of WaPo's sale to Jeff Bezos, the pension fund had a $1b surplus. This article describes the memo, and includes a link to a PDF (thru Scribd): http://fortune.com/2013/08/15/the-1975-buffett-memo-that-saved-wapos-pension/ http://fortune.com/2013/08/15/the-1975-buffett-memo-that-sav...

wpietri 12y ago
A point he still believes in. In 2008 he made a million-dollar bet with a highly-paid money manager: http://longbets.org/362/ http://longbets.org/362/ Seven years into the bet, he's way ahead: http://fortune.com/2015/02/03/berkshires-buffett-adds-to-his-lead-in-1-million-bet-with-hedge-fund/ http://fortune.com/2015/02/03/berkshires-buffett-adds-to-his... For those interested in the coin-flipping analysis, I strongly recommend "Fooled by Randomness", which is a smart, passionate, and funny examination of how that problem plays out in the investment industry.
- wnevets 12y ago
  >I strongly recommend "Fooled by Randomness", Its a really good read and can be applied to life outside of investment.
  - vithlani 12y ago
    I second this. To make it more effective, read every couple of years.

harry8 12y ago

The revenue model for investment managers is an annual wealth tax on their clients no matter how bad the returns! Hell of a way to charge fees, huh? Would we all love it if computer programming services were charged as a percentage of the market cap of the customer who needed the work done! But it's Wall St so everyone just accepts a wealth tax model. Then we take them seriously when they repeat their bullshit when to distract from their wealth destroying fees they scream "HFT" "Short Sellers" "The Frickin' Bogeyman"

wavesounds 12y ago

The biggest sham is that Wall Street has convinced us all that they deserve to paid in percentages! Sure %0.2 doesn't sound like much until you realize its $200 million dollars a year. Why is everyone so afraid of just hiring a few smart economists paying them $200k each salary? Nobody really beats the market over the long term anyway.

chris_b 12y ago
Because there are people who will pay those economists a percentage and they would rather work there?
learnstats2 12y ago
Because somebody already hired those people for a fixed wage and is smart enough to charge us a percentage for it?
blueside 12y ago
The same could be said for real estate agents

wodenokoto 12y ago

I'm a bit confused about what the author means when he says that managers should charge equal to the extra value they add to a portfolio. Why should I hire a manager that beats the market, he he charges the amount he beats the market with? Wouldn't that leave me of the same as simply averaging the market?

foota 12y ago
The idea being that in a perfectly competitive market the risk adjusted return for everything should be the same.
bmelton 12y ago
Because they aren't charging the amount they beat the market by, they're a percentage of that. In your example, you suggest that you could get $100 by using an index, but instead, you hire a guy who gets you $200 for not using an index, and then charges you the $100, and you're no better off. In the article, you could get $100 by using an index, but instead, you hired a guy who gets you $200, and then charges you a percentage of that, keeping $4 for them to your $196. Do you begrudge them their $4, knowing that you "profited" $96 on the deal? Yeah, the math gets uglier when you realize you're talking about much larger numbers, but the clients, e.g., the pension funds, still came out ahead against the index, even after the managers took their fees.
- smcl 12y ago
  Take the numbers you've used and switch them around slightly to reflect the NYC pensions situation and you can see why they'd be upset. It's not $4 in fees to an additional $96 returned to the client, it's $2billion in fees versus an additional $40m. Scaled back to your example that'd be like hiring a guy who gets you $200, keeping $98 for your $2.
  - bmelton 12y ago
    That would be incorrect. I just used numbers that weren't reflective of the article. To keep (dumbly) using my simple numbers, while still using their percentages, it would be more like this: You could get $100 by using an index, but instead, you hire a guy who gets you $103 for not using an index, then charge you a $2 fee, leaving you with a "profit" of $1. At the end of the day, the fund recipients still come out ahead, just not as much ahead as if the managers charged no fees. If you can figure out a way to get people to work for free, and do a good job on top of it, then you'll have surely cracked the code (or reinvented slavery). Until then, it's hard for me to demonize a money manager who charged two percent over ten years, even if it was two percent of a very large number.

sfjailbird 12y ago

Really puzzled how this is the top item on the Hacker News front page.

SQL2219 12y ago

This sector is loaded with opportunities to undercut the traditional players.

Nicholas_C 12y ago
The problem is you can't just create a startup fund and go in there and take on funds from pension funds by undercutting the establishment. You need loads of expertise, relationships, and a proven track record. And if you have all those things then you are a part of the establishment and already making swell money so there's no point in rocking the boat.

redwood 12y ago

Sad to see how hot the quant subject has become on here. Weakens nyc tech. This always happens when the bull market approaches peak.Suddenly every fund feels special because every fund is a winner.

putzdown 12y ago

"Managers should, on the whole, charge more than the value they add." But wouldn't that, trivially, make every managed fund always and inevitably less desirable than every unmanaged fund (assuming they aren't for other reasons)?

jim_greco 12y ago

Matt Levine does a great job of explaining scaremongering from the media (lately, mostly from the NYTimes) about Wall Street. My favorite is the Goldman Sachs aluminum "scandal" from last year: http://www.bloombergview.com/articles/2014-09-03/the-goldman-sachs-aluminum-conspiracy-lawsuit-is-over http://www.bloombergview.com/articles/2014-09-03/the-goldman... There's a lot of bad stuff that happens in finance, but we shouldn't be whipping out the pitch forks every time someone makes an accusation.

dreamdu5t 12y ago

Why is everyone focused on the fees being charged and not the total idiocy of the city of New York? The real outrage here is New York doesn't seem to know what they're doing with managing pension funds.

greedoshotlast 12y ago

A missing point: It is very common for management fees to follow an 2 and 20 Fee Structure. Meaning they charge a flat 2% to keeps the lights on and pay outrageous salaries. Then above a certain threshold an additional 20% of any profits earned. Why does this matter? IHMO this motivates funds managers to accumulate large AUM (Assets Under Management) to make that 2% larger. The fund manager is less motivated to make good returns since he knows he will still collect that 2%. So it might be better to remove the 2% flat fee and simple charge a percentage on the profits earned. This motivates the fund manager to actually generate returns before he makes a buck. Even if the market is going down he will still be motivated to outperform.