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Hedge Funds Are Pocketing Much of Their Clients' Gains with 'No Limit' Fees

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Re: Hedge Funds Are Pocketing Much of Their Clients' Gains with 'No Limit' Fees

#91

Post by [deleted] »

tombert wrote: post #76
pkkkzip wrote: post #73

Earlier quoted context omitted.

You just aren't as special or interesting as you think to them. Think about this, there are many finance focused graduates with several years of experience in that industry (buy-side im presuming from your comment) and being able to code isn't as special as SWE think it is. This is another case of software devs thinking they can crack finance/trading because they know how to code. The myopia comes from the difference…

I don't really think I'm terribly special. As I said in sibling comments, I have been trying to break into more of the software side, not the quant stuff. I don't think I need to be special in order to try to break in, as long as I set my expectations to "it's a long shot" mode. I do think that I could learn any level of quant if I really wanted to, but I would rather focus on the software stuff. I have about half of…

[deleted]

Re: Hedge Funds Are Pocketing Much of Their Clients' Gains with 'No Limit' Fees

#92

Post by ddmitriev »

asdasdsddd wrote: post #57
bberenberg wrote: post #13

Earlier quoted context omitted.

I think you need to consider time horizons when analyzing these funds. You can buy SPY and it will win. Unless there is a market crash when you hit retirement age, in which case you are screwed until the market recovers. If you don't mind the risk, go 2x levered and you will do even better. [0] Many institutions and HNW and UHNW individuals prioritize consistency over absolute growth. They would rather make 6-8% a ye…

I always see this "excuse". Our fund isn't focused on alpha; we minimize beta. It's just unclear to me whether this is shown out in the data.

I think they usually say that they are focused on alpha while minimizing beta, i.e. don't compare us to the S&P or other indices because we are market neutral. And in my experience, the large, old firms that I am personally familiar with do in fact have beta very close to 0 in their main funds, so on that front at least some firms do deliver.

This doesn't necessarily make the product a good idea even for people who can get an allocation, however. For example, because most (all?) market-neutral firms engage in active trading, a US UHNW person living in a high-tax state will generally have to pay around 50% of each year's gains in taxes. These taxes will have to be paid whether or not they did or were even allowed to withdraw any money from their investments that year, so a gain of let's say 12% becomes 6%, which may have to come out from some other source.

Re: Hedge Funds Are Pocketing Much of Their Clients' Gains with 'No Limit' Fees

#93

Post by missedthecue »

yieldcrv wrote: post #87
JumpCrisscross wrote: post #32

Earlier quoted context omitted.

CFPB is irrelevant for hedge fund LPs.

and is irrelevant in general since its just been nuked from orbit

Does a nuke from orbit generate more destruction than a suborbital nuke?

Re: Hedge Funds Are Pocketing Much of Their Clients' Gains with 'No Limit' Fees

#94

Post by ddmitriev »

yieldcrv wrote: post #8

I agree that's a problem to be discerning about - and it may be impossible to be discerning about - I also think people are looking for any reason to just "index" and purchase the S&P 500 or VOO ETFs like A) from being ineligible to be in hedge funds, and then B) to justify their fear but hedge fund returns are not able to really be aggregated so simply, there have been attempts, I can pull up whatever article you're…

This does not sound right. Maybe venture capital funds work this way? (I wouldn't know about them.)

But with regular hedge funds, you are joining a portfolio and you do get the return even on the positions that were in place at the time you invested. The only differences between investors that may affect the return that is allocated to them are a) their share classes, which may affect investment terms such as fees or withdrawal rights, and b) their respective high watermarks, which may affect the payment of performance fees. Everything else within the same fund will be the same.

Re: Hedge Funds Are Pocketing Much of Their Clients' Gains with 'No Limit' Fees

#95

Post by usefulcat »

chris_va wrote: post #81
thrill wrote: post #80

Hedge funds are entirely voluntary transactions on the part of participants.

Doesn't mean said participants can't get together and complain about it to try and improve market liquidity

How is market liquidity relevant here?

Re: Hedge Funds Are Pocketing Much of Their Clients' Gains with 'No Limit' Fees

#96

Post by chii »

jfengel wrote: post #62
barumrho wrote: post #55

Shouldn't this problem self-regulate, though? Ultimately, investors mainly care about the returns and if you can get better returns elsewhere due to these fees, they will switch. If they can charge large amount of fees and still stay competitive, then good on them, right?

There's a lot of friction. You won't switch based on one year, which would just leave you chasing last year's lucky winner (who will likely revert to the median next year). It takes a long time to realize that your hedge fund is a loser. The whole point of a hedge fund is for you to let someone else do the worrying. So the market is decidedly inefficient.

> It takes a long time to realize that your hedge fund is a loser.

it's been many decades since the existence of statistical analysis of hedge funds (as an aggregate) that demonstrates their lack of edge over benchmark passive index funds.

Some hedge funds would still out-perform. Most don't, and those who do tend to charge fees up to their level of edge, and leave only index-benchmark returns for their investors.

If you don't heed this evidence now, you deserve to lose money to these funds.

Re: Hedge Funds Are Pocketing Much of Their Clients' Gains with 'No Limit' Fees

#97

Post by pinkmuffinere »

arcticbull wrote: post #68
casercaramel144 wrote: post #65

Earlier quoted context omitted.

That's a really bad idea, those rebalance daily, so you are basically betting against short-term volatility (if spy goes down 10% in a day then up 10% the next, you are down 1% on spy, on a 2x levered etf you are down 4% or 4x the loss). Also both fees and slippage are really terrible on all levered ETFs If you really want to do 2x lever its probably best to just buy 6 month or 1 yr dated ITM calls. They're quite che…

And yet UPRO (3X SPY) has significantly outperformed 3X the S&P 500 since inception (since June 2009 UPRO is +8000% vs SPY +700%. The reason is exactly what you described actually. If the underlying exhibits positive momentum, generally trending up instead of oscillating back and forth, the daily balancing works for you instead of against you and the ETF outperforms the target multiple of the underlying. Yes, if your…

+1, the criticism of “if s&p goes up and come back down, leveraged investments lose” is just insufficient as a criticism. It examines only one case. I’m probably 30% in SPUU for years now, and would like to hear real criticisms — do you have any real criticisms to share? I legitimately have found so little competent commentary on it, and I think I understand the risk I’m taking, but don’t want to miss an opportunity to get considered input.

Re: Hedge Funds Are Pocketing Much of Their Clients' Gains with 'No Limit' Fees

#98

Post by chii »

ddmitriev wrote: post #92
asdasdsddd wrote: post #57

Earlier quoted context omitted.

I always see this "excuse". Our fund isn't focused on alpha; we minimize beta. It's just unclear to me whether this is shown out in the data.

I think they usually say that they are focused on alpha while minimizing beta, i.e. don't compare us to the S&P or other indices because we are market neutral. And in my experience, the large, old firms that I am personally familiar with do in fact have beta very close to 0 in their main funds, so on that front at least some firms do deliver. This doesn't necessarily make the product a good idea even for people who c…

> have to pay around 50% of each year's gains in taxes.

> ...will have to be paid whether or not they did or were even allowed to withdraw any money from their investments that year

That's crazy.

I would've thought the hedge fund would be able to hide the capital gains tax (as they're a trader, and should be exempted from capital gains taxes), so you as an investor only pays capital gains tax when you withdraw.

This also implies that the investor doesn't get to carry forward capital losses, or use it to offset their own outside capital gains.

Re: Hedge Funds Are Pocketing Much of Their Clients' Gains with 'No Limit' Fees

#99

Post by tombert »

alephnerd wrote: post #90
tombert wrote: post #76

Earlier quoted context omitted.

I don't really think I'm terribly special. As I said in sibling comments, I have been trying to break into more of the software side, not the quant stuff. I don't think I need to be special in order to try to break in, as long as I set my expectations to "it's a long shot" mode. I do think that I could learn any level of quant if I really wanted to, but I would rather focus on the software stuff. I have about half of…

> I have been trying to break into more of the software side, not the quant stuff > I have about half of a PhD in theoretical computer science There just aren't that many jobs in High Finance. They can concentrate on hiring EECS/ECE/CS majors from MIT, Harvard, Stanford, UC Berkeley, UIUC, Columbia, and Princeton and call it a day. But more critically, why would you even want to make that move? The RoI isn't that hig…

> The RoI isn't that high if you aren't quant.

The postings I see on Selby Jennings (and their equivalents) seem to show a considerably higher salary than the BigCo's that I've worked at. At least the salary bands that are listed.

That's honestly a big reason, but I also just find the world of ultra-low-latency software pretty interesting.

Re: Hedge Funds Are Pocketing Much of Their Clients' Gains with 'No Limit' Fees

#100

Post by testval123 »

chii wrote: post #96
jfengel wrote: post #62

Earlier quoted context omitted.

There's a lot of friction. You won't switch based on one year, which would just leave you chasing last year's lucky winner (who will likely revert to the median next year). It takes a long time to realize that your hedge fund is a loser. The whole point of a hedge fund is for you to let someone else do the worrying. So the market is decidedly inefficient.

> It takes a long time to realize that your hedge fund is a loser. it's been many decades since the existence of statistical analysis of hedge funds (as an aggregate) that demonstrates their lack of edge over benchmark passive index funds. Some hedge funds would still out-perform. Most don't, and those who do tend to charge fees up to their level of edge, and leave only index-benchmark returns for their investors. If…

The purpose of a hedge fund is to ‘hedge’ ie deliver alpha and not index beating returns. Obviously the fee issue is another layer.
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