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New York Discovers Wall Street Charges Fees

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Re: New York Discovers Wall Street Charges Fees

#81

Post by dlubarov »

morgante wrote: post #9
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.

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.

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.

Re: New York Discovers Wall Street Charges Fees

#82

Post by jib »

hkmurakami wrote: post #73
jib wrote: post #70

Earlier quoted context omitted.

The argument is they are gambling with just a downside, so why are they not just buying indexed funds, right? If you lose money on actively managed funds, you lose the money. If you win money on actively managed funds, you get a small part of the win, and give away a large part of the win to the guy who was gambling (how large is clearly a contract question). If the part you give away is too big, you are playing a fo…

The article suggests that the fees were comprised of management fees only. This is a common structure for "long only" management funds that limit their exposure to public equities and are under significant restraints in how "creative" they are allowed to be.

But that is even worse, right?

That is paying a fixed price for someone to gamble for you.

If you look at it objectively, a more sane pricing model would be that you get a discount on the flat fees compared to what you would pay for a non-managed fund, but with a bonus paid on earnings.

The value proposition from the fund managers is that they can significantly outperform a non-managed fund. If that is true, then what they lack is capital to actually play on a large enough scale (if they had the capital they would just play with their own money after all). Pension funds have a large amount of capital that they want to accrue interest on.

The win-win scenario is that the fund managers agree to handle the money at a lower cost than what having them in some form of indexed managed would be, but that in return they take a share of any profits that are generated.

If you just add on a flat % fee that is higher than what the indexed fund would charge, then the fund manager isnt assuming any risk.

Re: New York Discovers Wall Street Charges Fees

#83

Post by cmdkeen »

alextgordon wrote: post #77
obstinate wrote: post #40

Earlier quoted context omitted.

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.

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.

Re: New York Discovers Wall Street Charges Fees

#84

Post by ville »

morgante wrote: post #9
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.

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.

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?

Re: New York Discovers Wall Street Charges Fees

#85

Post by cmdkeen »

mturmon wrote: post #12

There has been a series of recent lawsuits that have required pension funds to perform proper due diligence when selecting management for retirement funds. (E.g., http://www.bloomberg.com/news/articles/2015-02-20/lockheed-a... and http://www.retirementtownhall.com/?p=6763 ) The possibility for kickbacks (or just complacency) when the ones selecting the fund managers do not necessarily have significant funds under man…

Pension funds these days do an awful lot of work to decide how to invest, and who to invest with. They send out RFIs which an awful lot of due diligence questions, have access to independent consultants to advise on active/passive strategies etc.

Active managers compete for business, and retaining clients even when performance is good is not easy. One of the key differentiators isn't just performance but client service - if you're investing $40bn of other people's pensions then you want to get good answers from your active investors about their thinking, where they see things going, risks, performance etc.

Oh and the best active managers charge relatively low fees, it is very much not a case of "you get what you pay for" - low fees and high assets under management is a much better money making model for everyone.

Re: New York Discovers Wall Street Charges Fees

#86

Post by mehwoot »

lionhearted wrote: post #41
toomuchtodo wrote: post #20

Earlier quoted context omitted.

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 unde…

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.

The second study linked found

Only 0.6% — you read that right, 0.6% — showed any true skill at beating the market consistently, “statistically indistinguishable from zero,” the three researchers concluded.

So your cavets, whilst valid, I don't think go anywhere near disputing the central point.

Re: New York Discovers Wall Street Charges Fees

#87

Post by evandijk70 »

jib wrote: post #82
hkmurakami wrote: post #73

Earlier quoted context omitted.

The article suggests that the fees were comprised of management fees only. This is a common structure for "long only" management funds that limit their exposure to public equities and are under significant restraints in how "creative" they are allowed to be.

But that is even worse, right? That is paying a fixed price for someone to gamble for you. If you look at it objectively, a more sane pricing model would be that you get a discount on the flat fees compared to what you would pay for a non-managed fund, but with a bonus paid on earnings. The value proposition from the fund managers is that they can significantly outperform a non-managed fund. If that is true, then wha…

While this sounds good in theory, this encourages high-risk investments, that either pay-off enormously or lose everything.

Re: New York Discovers Wall Street Charges Fees

#88

Post by Shivetya »

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…

The issue isn't how much they are being charged, the issue is that far too many public employee unions have large pension deficits and cities, states, and the like, need a bogeyman. Looking for related stories, this pension went from over funded in 99 to underfunded by 2012, to the tune of only having 63% of what is should have.

Likely this is just the trial balloon, expect similar articles as the truth about government employee pensions funding comes to the forefront. Unlike private pensions the government at different levels can twist the rules quite a bit.

couple of scenarios come out of this 1) cuts to benefits, likely only through bankruptcy like Detroit. NYC should be able to avoid this result 2) tax increases to fund the pensions properly 3) finding new creative ways to fine financial companies for exploiting retirees and the like 4) bailouts, after all we have elections in a few years and what good polio wouldn't be for bailouts.. by the state or feds (again not necessarily for NYCERS, they are bad off but not the worst out there)

I

Re: New York Discovers Wall Street Charges Fees

#90

Post by jackgavigan »

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.

> In a free competitive market fees for algorithmic or mechanical money management would...

In what way is the market not free and competitive?

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