New York Discovers Wall Street Charges Fees • Hacker News Board

Re: New York Discovers Wall Street Charges Fees

#31

Post by jcdavis » Fri, Apr 10, 2015, 5:20 AM UTC

guelo wrote: post #7

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.

The 0.17% is only for the "investor class" shares, which starts at 3k. Invest 10k and you get "admiral class" shares which charge only 0.05%. At $5m you can get "institutional "which only charges 0.04%, and at $200m you can get "institutional plus" that charges 0.02%, which any big pension fund could have

Re: New York Discovers Wall Street Charges Fees

#32

Post by lifeisstillgood » Fri, Apr 10, 2015, 5:20 AM UTC

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?

Re: New York Discovers Wall Street Charges Fees

#33

Post by lloydde » Fri, Apr 10, 2015, 5:21 AM UTC

astazangasta wrote: post #24

aioprisan wrote: post #3

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…

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%.

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.

Re: New York Discovers Wall Street Charges Fees

#34

Post by lifeisstillgood » Fri, Apr 10, 2015, 5:22 AM UTC

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?

Re: New York Discovers Wall Street Charges Fees

#35

Post by mjfl » Fri, Apr 10, 2015, 5:24 AM UTC

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.

Re: New York Discovers Wall Street Charges Fees

#36

Post by grmarcil » Fri, Apr 10, 2015, 5:24 AM UTC

astazangasta wrote: post #24

aioprisan wrote: post #3

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…

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%.

The public market funds outperformed their passively managed benchmarks, even considering the management feeds paid. To continue your mortgage comparison, New York is paying a real estate professional a certain percentage of money to find them a better deal on their mortgage, and NY still gets a better rate going through them after their fees are paid.

Re: New York Discovers Wall Street Charges Fees

#37

Post by lionhearted » Fri, Apr 10, 2015, 5:26 AM UTC

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?

Re: New York Discovers Wall Street Charges Fees

#38

Post by dragontamer » Fri, Apr 10, 2015, 5:27 AM UTC

lifeisstillgood wrote: post #32

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) ab…

> 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.

Re: New York Discovers Wall Street Charges Fees

#39

Post by grmarcil » Fri, Apr 10, 2015, 5:29 AM UTC

navait wrote: post #30

p0ckets wrote: post #10

Earlier quoted context omitted.

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 pe…

I'm not sure I understand - what's the benefit to the customer? If you gain alpha from hiring (3), you gain proportion of alpha + alpha. If you hire (4), you're paying a fee of alpha for a gain < alpha. The customer assumes a lot of risk, especially the more common (4) gets. It seems the customer is most likely to lose in this scenario.

The model is from the perspective of fund managers. If you believe his model, then from the other side of the board, as an investor, your conclusion has to be that managed funds are a bad deal, or a break even at best if you find a manager with alpha.

Re: New York Discovers Wall Street Charges Fees

#40

Post by obstinate » Fri, Apr 10, 2015, 5:36 AM UTC

jcdavis wrote: post #31

guelo wrote: post #7

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.

The 0.17% is only for the "investor class" shares, which starts at 3k. Invest 10k and you get "admiral class" shares which charge only 0.05%. At $5m you can get "institutional "which only charges 0.04%, and at $200m you can get "institutional plus" that charges 0.02%, which any big pension fund could have

That's really interesting. So you could put $200M of assets into a Vanguard fund and only get charged $40k/y for that. It seems like a very small number when you put it that way.