5 ms·

> In a competitive market for investment performance, managers should charge fees equal to their outperformance. Then what's the value in a fund manager instea

by 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.

by rodgerd 12y ago

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.