augusti 10, 2009

Hedge funds, hedge funds: now cheaper AND better!

Finally there is some hard evidence of hedge funds actually lowering their fees. The insane 2%—20% (2% fee on assets under management and a 20% share of any (positive) return) seems to slowly give way to lower and more reasonable fees. According to a recent survey, the average hedge fund fee is now closer to 1.63%—17.2% than 2%—20%! I like!

Hopefully this is a sustainable trend, and not just a blip, caused by investors getting more say in the discussion between the principal and the agent. I have discussed this problematic relationship in many previous blogs and I still think that’s where the effort has to be put in. Of course there are funds out there that by hard work and clever management manage to beat the market (create genuine alpha) and of course they should charge through the nose. I wouldn’t mind fees as large as 2%—50% if I only had to pay when such a fund produced a return on my money above let’s say 10%. What I don’t like is paying 2%—20% to a mediocre manager flipping a coin. Let’s take two (flipping) examples from the world of bubble-economics to make my point even clearer:

- The stock market period from 2002 up to the crisis was a bubble! In such periods anyone can make money, even the children of the rich and famous. Look at a certain Mr Noel, the feeder fund manager of Mr Madoff! He f**g hired all his childrens’ spouses to manage his funds. What a wonderful coincidence that his daughters happened to marry investment geniuses! I don’t want this people to manage my money, that’s it! And it is (were?) more common than you think to find guys like these in leading hedge fund positions. I am sure this crowd will swiftly return to the interior design schools, (luxury) shop managing and import-export business where they belong now when basic economics/investment skills matter more than who you know......

- The real estate market period from 2002 up to the crisis was a bubble! In such periods anyone can make tons of money, even a simple real estate developer. Look at a certain (charming and hilarious, I admit) Mr Lewis from Flipping Out, the TV series. With the recent turn of the LA real estate market the fortunes of this guy turned negative as well. His ever bigger bets on million dollar houses in the LA area that previously landed him many nice dollars in the bank suddenly disappeared (at best). Obviously, in times such as these, only the best developers will survive. Whether Mr Lewis is one of them I cannot tell.......

In the next couple of years I suspect the “market” will allow less “bubbles” to form. That’s when running a hedge fund will be difficult and at the same time that’s when the investor really needs a hedge fund to smoothen his/her returns. Therefore, in the future a properly run hedge fund will definitely manage some of my money. I can promise you that I will look carefully at who manages this fund though! There will be no rich kids and there will be no former real estate flippers managing them, that’s for sure!