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New York Discovers Wall Street Charges Fees

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Re: New York Discovers Wall Street Charges Fees

#121
post #83

Earlier quoted context omitted.

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?

The opposite, actually. With those sorts of assets you have to start getting worried about algorithms front-running your trades and things like that.

Also, "the market" is big.

Re: New York Discovers Wall Street Charges Fees

#122
post #83

Earlier quoted context omitted.

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?

I see you're getting downvoted, but no one is bothering to explain.

First, the market in general works in the exact opposite way. You can invest a million dollars a lot of places; with enough luck and skill you'll earn a great return. Keep doing that and soon you'll have, say, 500 million.

But 500 million is harder to invest; you might say "stock X is really undervalued; I'm going to go long!", but if stock X has a market cap of 10 billion, you'll struggle to find 500 million in shares to purchase on a whim, and in so doing, you'll push the price up, and now it's no longer undervalued. Many investments that work for the guy with 1m don't work for the guy with 500m.

But if you keep going and keep being lucky (or skilled) you might end up with billions or hundreds of billions. Now you're basically fucked. Most possible investments don't have the liquidity or capacity to absorb the money you're trying to place. At this scale you aren't picking companies; you're picking industrial sectors or countries. You'll never make a great return like that. Plus you're being watched constantly; the merest rumour that you're about to invest will end prices soaring or crashing before you can move. You can "push the market around", but only in ways that benefit smaller, nimble players, not you. At that scale, your ability to be clever is basically nil.

Which brings us to the second point: Vanguard is an index fund. They simply buy an even mix of the shares that make up an index. Their entire strategy/promise is that they won't "push the market around" (which is the reason they have $3t under management; people explicitly looking for people who won't try and be clever).

So your question is "couldn't Vanguard do the one thing they don't do, because it can't work"? And the answer is no, it can't work, which is why Vanguard exists and has those assets.

Re: New York Discovers Wall Street Charges Fees

#123
post #99

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 in…

>I strongly recommend "Fooled by Randomness",

Its a really good read and can be applied to life outside of investment.

Re: New York Discovers Wall Street Charges Fees

#124
post #58

Earlier quoted context omitted.

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.

78B does seem fairly large. For comparison: NYC (pop. 8.4M): 78B Los Angeles (pop. 3.8M): 8.1B USD Toronto (pop. 2.8M): 10B CDN Chicago (pop. 2.7M): 9B USD I expected the city's budget to be in the double-digit billions, but in the 40 - 50 billion range. I wonder if it's something in how the headline numbers are calculated. Toronto splits out its operating and capital budgets, and there are some services like social…

> I wonder if it's something in how the headline numbers are calculated.

This is correct. NYC is basically sui generis for American cities. As examples, there's essentially no county government and the school system is part of the city government. The school system alone accounts for $20B of the $78B and over 100,000 of the 360,000 city employees...AND those school numbers don't include the $900M for the city-funded-and-operated 4-year university system.

Re: New York Discovers Wall Street Charges Fees

#125

Earlier quoted context omitted.

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 (typicall…

i hope you are having fun doing it, cause at $2/years for 10 hours a week, you're paying yourself half the minimum wage.

"I do this as a hobby..."

I also earn a bit more than $2k on other strategies. I was just describing my highest return strategy and explaining why it can't scale for the sake of discussion.

The real benefit of trading, and why I encourage most quant devs to do it even if they lose money is that it is great mental exercise. When you make mathematical or rationality errors, the market punishes you by taking your money. That's my real reason for actively trading.

Re: New York Discovers Wall Street Charges Fees

#126
post #99

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 in…

You may be interested to read the other guy's take on that bet. One of the more interesting reads on the business of running a hedge fund I've seen.

http://blogs.cfainstitute.org/investor/2015/02/12/betting-wi...

(Disclosure: I work at CFAI)

Re: New York Discovers Wall Street Charges Fees

#127
post #29
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?

>Then why not just invest in an index fund?

This is what most level headed people who study the stock market suggest you do!

Re: New York Discovers Wall Street Charges Fees

#128
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...

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.

Re: New York Discovers Wall Street Charges Fees

#129
post #122

Earlier quoted context omitted.

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

I see you're getting downvoted, but no one is bothering to explain. First, the market in general works in the exact opposite way. You can invest a million dollars a lot of places; with enough luck and skill you'll earn a great return. Keep doing that and soon you'll have, say, 500 million. But 500 million is harder to invest; you might say "stock X is really undervalued; I'm going to go long!", but if stock X has a m…

However there are strategies available to active investors with billions - being an "activist investor".

If you buy significant stakes in companies - which might be only a percentage point or two, but still putting you in the top individual shareholders, then you have the ability to change the strategy of the company.

The step up from that is into Berkshire Hathaway / private equity territory where you just buy companies, or very significant stakes and run them as you want to.

Re: New York Discovers Wall Street Charges Fees

#130
post #99

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 in…

Also take a look at "The Drunkard's Walk" - same vein.
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