Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
AI Mega-trend Tech Stocks Buying Levels Q2 2020 - 1st Jun 20
M2 Velocity Collapses – Could A Bottom In Capital Velocity Be Setting Up? - 1st Jun 20
The Inflation–Deflation Conundrum - 1st Jun 20
AMD 3900XT, 3800XT, 3600XT Refresh Means Zen 3 4000 AMD CPU's Delayed for 5nm Until 2021? - 1st Jun 20
Why Multi-Asset Brokers Like TRADE.com are the Future of Trading - 1st Jun 20
Will Fed‘s Cap On Interest Rates Trigger Gold’s Rally? - 30th May
Is Stock Market Setting Up for a Blow-Off Top? - 29th May 20
Strong Signs In The Mobile Gaming Market - 29th May 20
Last Clap for NHS and Carers, Sheffield UK - 29th May 20
The AI Mega-trend Stocks Investing - When to Sell? - 28th May 20
Trump vs. Biden: What’s at Stake for Precious Metals Investors? - 28th May 20
Stocks: What to Make of the Day-Trading Frenzy - 28th May 20
Why You’ll Never Get Another Stimulus Check - 28th May 20
Implications for Gold – 2007-9 Great Recession vs. 2020 Coronavirus Crisis - 28th May 20
Ray Dalio Suggests USA Is Entering A Period Of Economic Decline And New World Order - 28th May 20
Europe’s Coronavirus Pandemic Dilemma - 28th May 20
I Can't Pay My Payday Loans What Will Happen - 28th May 20
Predictive Modeling Suggests US Stock Markets 12% Over Valued - 27th May 20
Why Stocks Bear Market Rallies Are So Tricky - 27th May 20
Precious Metals Hit Resistance - 27th May 20
Crude Oil Cuts Get Another Saudi Boost as Oil Demand Begins to Show Signs of Life - 27th May 20
Where the Markets are heading after COVID-19? - 27th May 20
Silver Springboards Higher – What’s Next? - 26th May 20
Stock Market Key Resistance Breakout Is Where the Rubber Meets the Road - 26th May 20
5 Ways To Amp Up Your CFD Trading Today - 26th May 20
The Anatomy of a Gold Stock Bull Market - 26th May 20
Stock Market Critical Price Level Could Soon Prompt A Big Move - 25th May 20
Will Powell Decouple Gold from the Stock Market? - 25th May 20
How Muslims Celebrated EID in Lockdown Britain 2020 - UK - 25th May 20
Stock Market Topping Behavior - 24th May 20
Fed Action Accelerates Boom-Bust Cycle; Not A Virus Crisis - 23rd May 20
Gold Silver Miners and Stocks (after a quick drop) Ready to Explode - 23rd May 20
3 Ways to Prepare Financially for Retirement - 23rd May 20
4 Essential Car Trade-In Tips To Get The Best Value - 23rd May 20
Budgie Heaven at Bird Land - 23rd May 20
China’s ‘Two Sessions’ herald Rebound of Economy - 22nd May 20
Signs Of Long Term Devaluation US Real Estate - 22nd May 20
Reading the Tea Leaves of Gold’s Upcoming Move - 22nd May 20
Gold, Silver, Mining Stocks Teeter On The Brink Of A Breakout - 21st May 20
Another Bank Bailout Under Cover of a Virus - 21st May 20
Do No Credit Check Loans Online Instant Approval Options Actually Exist? - 21st May 20
An Eye-Opening Perspective: Emerging Markets and Epidemics - 21st May 20
US Housing Market Covid-19 Crisis - 21st May 20
The Coronavirus Just Hit the “Fast-Forward” Button on These Three Industries - 21st May 20
AMD Zen 3 Ryzen 9 4950x Intel Destroying 24 core 48 thread Processor? - 21st May 20
Dow Stock Market Trend Analysis and Forecast - 20th May 20
The Credit Markets Gave Their Nod to the S&P 500 Upswing - 20th May 20
Where to get proper HGH treatment in USA - 20th May 20
Silver Is Ensured A Prosperous 2020 Thanks To The Fed - 20th May 20
It’s Not Only Palladium That You Better Listen To - 20th May 20
DJIA Stock Market Technical Trend Analysis - 19th May 20
US Real Estate Showing Signs Of Covid19 Collateral Damage - 19th May 20
Gold Stocks Fundamental Indicators - 19th May 20
Why This Wave is Usually a Market Downturn's Most Wicked - 19th May 20
Gold Mining Stocks Flip from Losses to 5x Leveraged Gains! - 19th May 20
Silver Price Begins To Accelerate Higher Faster Than Gold - 19th May 20
Gold Will Soar Soon; World Now Faces 'Monetary Armageddon' - 19th May 20

Market Oracle FREE Newsletter

Coronavirus-stocks-bear-market-2020-analysis

Why Hedge Funds Are a Lousy Investment

Companies / Investing 2013 Apr 25, 2013 - 01:49 PM GMT

By: Money_Morning

Companies

Martin Hutchinson writes: The one thing you can guarantee when investing in hedge funds is, the managers are going to get rich...even if the investors don't.

Don't get suckered into believing you will be taking your investing strategy to the next level. The difference between reality and perception is stark and the only people sure to win are the managers themselves.


The annual report on the 25 highest paid hedge fund managers came out last week and the results were no less outrageous than they have been for years: $14.1 billion in pay and paper profits on their own investments in 2012, slightly down from 2011's $14.4 billion, according to Institutional Investor Alpha's Rich List.

You can do the math - the average top 25 hedge fund manager took home $564 million in 2012, down from $576 million in 2011.

The big question is, what did these managers do for their investors to earn these kinds of sums?

After all Lloyd Blankfein, CEO of Goldman Sachs, took home a measly $21 million.

In 2011, the average hedge fund lost money, even before the $14+ billion creamed off by the top 25 managers. In 2012 the average hedge fund made a weak 6.4% for its investors, according to Hedge Fund Research.

That means it trailed a passive portfolio of 40% bonds and 60% stocks by almost 5 percentage points. This is one of the big reasons I have disliked hedge funds for so long. They seem built more for managers amassing wealth than doing so for their investors.

The Devils in the Details
One difficulty with the list is that it counts both the "carried interest" percentage of the fund's profits that the management company received (and that is taxed at capital gains tax rates of 15% in 2012 - 20% in 2013 -- rather than at income tax rates) and the return on the manager's own investment in the fund.

To see how this works, suppose a manager has a $10 billion fund, and he has an investment of $1 billion in the fund. Then suppose the fund has an excellent year, making a 30% return. The management company will receive as "carried interest" a return of $10 billion x normally 20% of the profits of 30%, or $600 million.

The manager will receive 24% (30% minus the 6% "carried interest") on his own $1 billion, for an additional $240 million. His total return, assuming he owns 100% of the management company and employs nobody but unpaid interns to manage the fund, will be $840 million.

In practice, you have to pay the help something, and there's probably an office, but those may both be charged to the fund as expenses. But it's nice to get paid twice all the same.

That accounts for the average manager, but it doesn't account for the top guy, David Tepper, who runs the $15 billion hedge fund Appaloosa, who took home $2.3 billion last year. Granted, Appaloosa investors had a very good year, making 30% after fees, according to the Financial Times.

But using the calculation above, if Tepper had $2 billion invested in the fund, he should have taken home $2 billion x 30% plus $15 billion x 7.5%, or $1.725 billion. The fact that he made an extra $575 million above that suggests that Appaloosa's fee structure is even more generous than the norm.

As for 2011's leader Ray Dalio of Bridgewater ($4.3 billion in 2011), he had to be contented with a measly $1.9 billion in 2012. But then his leading hedge fund, Pure Alpha, is said by ZeroHedge to have achieved a return of only 0.8%.

Bridgewater's funds under management total $142 billion, but even so a fee of $1.9 billion (not much of which can have come from fund's return) for underperforming the market by 10 full percentage points really does seem a teensy bit excessive. And Pure Alpha likely isn't having a great 2013 either, since it has a large long gold position, currently down some 20% this year.

It's About Forbes, Not the Markets
A number of hedge fund guys feature prominently on the Forbes 400 "rich list" - I count eight of the top 40, headed by George Soros at #15, whose businesses consist mostly of hedge funds or private equity funds.

We can largely thank Ben Bernanke for this; his "funny money" and that of Alan Greenspan before him have enabled hedge funders and private equity managers to borrow at almost zero interest cost in real terms. Naturally, if you can borrow at zero, the best deal is to leverage yourself to infinity and invest in assets, any assets, provided they make some kind of return.

That's why the Forbes Rich List, which 30 years ago consisted mostly of inherited money and a few industrial titans, is now dominated by the get-rich-quick crowd (there are a few casino owners on there too).

I hope you're getting the message: Hedge funds are a lousy investment.

You can get a good exchange traded fund or managed equity fund with fees and expenses of only 1% or so and no front-end load - Vanguard's are the cheapest but there are several other good investment management groups - whose CEOs are paid less than Lloyd Blankfein and a tiny fraction of the hedge fund titans. With an ordinary mutual fund, you will get just as much management skill as with a hedge fund, and in years like 2011 and 2012 you'll achieve a better return.

Don't imagine either that when your broker comes to you with a hedge fund proposition and tells you that you can join "the elite" by investing that there will be any special treatment once you've invested. Even with a $1 million investment, you represent maybe an hour or two's earnings for the hedge fund chief - his real money comes from places like the Harvard Endowment, with $30 billion under management

Of course, the Harvard Endowment would also do better by putting the lot into a few index funds.

But then its managers, in turn, would have to be remunerated like ordinary people - which would never do!

Source :http://moneymorning.com/2013/04/25/why-hedge-funds-are-a-lousy-investment/

Money Morning/The Money Map Report

©2013 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules