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New York Discovers Wall Street Charges Fees

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Re: New York Discovers Wall Street Charges Fees

#91

Post by jackgavigan »

harmegido wrote: post #61
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…

I disagree with #2. I'm an individual investor. I can get into vanguard index funds for around a 0.05 fee, depending on the fund. The author estimates that the NYC pensions were paying a roughly 0.25 fee on their funds. That's a $10 billion customer paying 5X in fees what a small investor like me pays. I think that's insane.

> The author estimates that the NYC pensions were paying a roughly 0.25 fee on their funds.

Where does it say that? I just did search on the web page and the string "25" doesn't appear anywhere.

Perhaps you're rounding up from this number: "total fees of about 0.24 percent a year on all assets, including private assets."

If you are, you're not comparing like with like. The closest equivalent in the article to your index funds is this: "The fees that NYCERS pays for U.S. domestic public equities are about 0.08 percent a year".

So we're now comparing 0.05% for an index fund vs 0.08% for "US domestic public equities", which almost certainly includes actively-managed funds, which incur higher fees than an index fund (e.g. Vanguard's average active fund expense ratio is 0.27%[1] vs 0.13% for index funds[2]), which would explain the 0.03% difference.

1: https://investor.vanguard.com/mutual-funds/actively-managed

2: https://investor.vanguard.com/mutual-funds/index-funds

Re: New York Discovers Wall Street Charges Fees

#92

Post by nandemo »

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…

> 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.

If you round up 0.08%, it should be 99.9% and 0.1% respectively.

Re: New York Discovers Wall Street Charges Fees

#93

Post by yourapostasy »

lionhearted wrote: post #37

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…

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...

Re: New York Discovers Wall Street Charges Fees

#94

Post by ZachPruckowski »

nandemo wrote: post #92
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…

> 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. If you round up 0.08%, it should be 99.9% and 0.1% respectively.

You're not supposed to round 0.08, you're supposed to divide 0.08/8.24. The 8.24 is the percentage point return for the pension fund and the 0.08 is the percentage point cost for the fees

Re: New York Discovers Wall Street Charges Fees

#95

Post by pbhjpbhj »

cmdkeen wrote: post #83
alextgordon wrote: post #77

Earlier quoted context omitted.

Which begs the question, how are they really making their money?

Because they have $3 trillion in assets under management - which is $600m a year even at 2 basis points in fees, which not everyone pays. Economies of scale ramp up quickly.

With that sort of weight of assets surely they can push the market around enough to gain no matter where prices move?

Re: New York Discovers Wall Street Charges Fees

#96

Post by Enzolangellotti »

defen wrote: post #29
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…

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?

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.

Re: New York Discovers Wall Street Charges Fees

#97

Post by bzbarsky »

nandemo wrote: post #92
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…

> 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. If you round up 0.08%, it should be 99.9% and 0.1% respectively.

No, because the 0.08% is a percentage of the _assets_. So if your return is 8.24% of assets per year and your fees are 0.08% of asserts per year, then your fees are 0.08/8.24 = 0.0097 of your returns. Or in other words 0.97% of the returns. Rounding gives you the 1%.

Re: New York Discovers Wall Street Charges Fees

#98

Post by Lazare »

defen wrote: post #29
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…

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?

> 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-...

Re: New York Discovers Wall Street Charges Fees

#99

Post by wpietri »

ringshall wrote: post #44

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…

A point he still believes in. In 2008 he made a million-dollar bet with a highly-paid money manager:

http://longbets.org/362/

Seven years into the bet, he's way ahead:

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.

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