New York Discovers Wall Street Charges Fees • Hacker News Board

Re: New York Discovers Wall Street Charges Fees

#41

Post by lionhearted » Fri, Apr 10, 2015, 5:38 AM UTC

toomuchtodo wrote: post #20

infinii wrote: post #16

Earlier quoted context omitted.

Not only that but does it really take double the effort for an invement manager to manage $100B compared to $50B?

Investment managers almost never beat an index: http://www.marketwatch.com/story/index-funds-beat-active-90-... http://www.marketwatch.com/story/almost-no-one-can-beat-the-... http://www.theglobeandmail.com/globe-investor/investment-ide...

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.

Re: New York Discovers Wall Street Charges Fees

#42

Post by dd36 » Fri, Apr 10, 2015, 5:43 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

So New York pensioners would have saved $1.8 billion?

Re: New York Discovers Wall Street Charges Fees

#43

Post by zaroth » Fri, Apr 10, 2015, 5:53 AM UTC

dd36 wrote: post #42

jcdavis wrote: post #31

Earlier quoted context omitted.

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

So New York pensioners would have saved $1.8 billion?

No, they would have earned a lower overall return, net of fees. That's the point of the rebuttal article, the original NYTimes piece was a hatchet job.

Re: New York Discovers Wall Street Charges Fees

#44

Post by ringshall » Fri, Apr 10, 2015, 5:55 AM UTC

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-sav...

Re: New York Discovers Wall Street Charges Fees

#45

Post by btilly » Fri, Apr 10, 2015, 5:57 AM UTC

p0ckets wrote: post #10

rodgerd wrote: post #2

> 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.

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…

And the simple model is wrong. Here is why.

If you are a customer for hedge funds, you should be willing to pay anything up to the expected future alpha based on past correlations between previous and future alpha.

That correlation is always affected by regression to the mean. Therefore someone with a good track record will not be able to charge on the expectation of future performance matching past performance. But only on the expectation of future performance being somewhat better than the market mean.

The ideal if everyone does everything perfectly is that, on average, fund managers that can generate excess alpha will, again on average, capture their entire outperformance as fees.

Re: New York Discovers Wall Street Charges Fees

#46

Post by harry8 » Fri, Apr 10, 2015, 6:01 AM UTC

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"

Re: New York Discovers Wall Street Charges Fees

#47

Post by harry8 » Fri, Apr 10, 2015, 6:05 AM UTC

sukilot wrote: post #25

maxk42 wrote: post #17

> 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?

If they underperforming benchmark will they eat the loss?

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?

Re: New York Discovers Wall Street Charges Fees

#48

Post by wavesounds » Fri, Apr 10, 2015, 6:09 AM UTC

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.

Re: New York Discovers Wall Street Charges Fees

#49

Post by wodenokoto » Fri, Apr 10, 2015, 6:10 AM UTC

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?

Re: New York Discovers Wall Street Charges Fees

#50

Post by tsotha » Fri, Apr 10, 2015, 6:12 AM UTC

hurin wrote: post #14

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.

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.