That's not entirely true. Buffet ran a hedge fund himself in the 60s, I think for a total of 11 or 12 years with spectacular results and he didn't feel it was immoral to take 25% of all profits from his investors. What he doesn't like with most funds is the FIXED FEES. 1.5, 2 or 3% charged where there are profits to share or not. He mentioned this specifically numerous times.
Didn't hear any about his views from the '60s.... maybe he changed his mind about what's "moral". Besides, the "fixed fee" isn't the big issue, rather management's incentive to take big risk with no consequences other than the disadvantegement of investors.
Look, I've studied game theory, I understand moral hazard...the legal structure encourages you to rig a hedge fund so it's a negative sum game for investors, but a positive sum game for yourself. Not rocket science. Thing is, I take on less REAL risk than an index fund. A 5 standard deviation down day isn't going to even going to do that much.
How are you going to become a successul hedge fund manager if you are so easily swayed by authority? You need to be able to think independently, and have less respect for other people's opinions. Being able to dismiss a billionaire industry expert as a clueless fuckwit is part and parcel of being a good trader. Case in point - Countrywide Financial, Mozilo, and Bill Miller. You had a stinking rich CEO who was a real estate expert, and a guy with a great mutual fund record of beating the S&P, and both were very bullish and very wrong. If you can't short a crapload of stock right into their face in situations like that then you have a problem. "If someone has a gun and is trying to kill you, it would be reasonable to shoot back with your own gun." - the Dalai Lama.
Why do you explain this to an anonymous message board when you should tell your billionaire acquaintance directly instead?
you simply do no not understand there is an incentive for hedge fund managers to go for home runs with little or no consequences for their misperformance.
Doesn't this depend entirely on the structure of the fund in question? Since neither you nor the old geezer knows wutang, for all you know he could be charging 0% management fees, 25% of profits in excess of the T-bond yield, and giving investors a 3 year clawback on profits. In which case ALL of your points would not only be totally wrong and ridiculous, they would be the exact opposite of the truth. Looks like you are just as much of a prejudiced judgemental person as the old guy. FYI, hedge funds (the decent ones anyway) usually have significant participation by the fund manager, so if investors get hosed then the fund manager does too. Contrast this with mutual funds where significant fund manager participation is very rare. So not only do typical hedge fund managers share the pain of investors, they do so much more than mutual funds. In fact, most hedge fund managers have far more of their net worth in the fund than *any* investor does - they suffer much MORE pain than any investor from losses. Regarding fees, exorbitant fees are not universal and they are hardly a sole preserve of the hedge fund industry. Real estate agents charge exorbitant fees - 6%. Since when do you or anyone else describe real estate agency as immoral? Mutual funds charge exorbitant fees - some of the I-bank index funds charge 1.5%, about TEN TIMES what Vanguard charge on theirs, for exactly the same product. Show me a single hedge fund which charges ten times the industry benchmark. Besides, investors are well aware of the fees cand choose to pay them of their own free will. If someone is making you 20-30% per annum with less volatility than the S&P, who would begrudge them making 5-6% on top of that? As an investor you still make the lion's share of the profits. Most hedge fund management fees are to cover staff and premises, they are not a profit centre on the whole. If the fund manager does not perform, he makes no money, simple as that. Even if they are "exorbitant" (i.e. if the fund doesn't beat the market). As for Buffett, he ran an investment partnership in the 50s and 60s which was basically a long-only equity hedge fund. His fees? 25% of profits above the bond rate. So much for Buffett thinking hedge funds are immoral - he is charging rates just as high as what you call "exorbitant". It's hard to see how a voluntary arrangement where risks and fees are fully disclosed can be described as immoral. That sobriquet is normally reserved for activities which actually harm people, deceive them, or otherwise infringe their rights or cause them serious hardship. Please explain how a typical hedge fund is guilty of any of these wrongdoings?
A basic part of due diligence is to check that the fund manager has a large chunk of his net worth in the fund. This then gives them a very powerful incentive NOT to take insane risks, since they will lose huge amounts of their own money if they blow up. In addition, the better funds almost all know this already and have large manager participation out of pure self interest (since the returns are higher than they would get elsewhere, they prefer to "self-invest"). Your statement is therefore incorrect. You are pointing out a flaw of 3rd rate funds run by gamblers and idiots, not a flaw that applies to all hedge funds, let alone the good ones. If an investor can't be bothered to do even the most basic due diligence checks to see if the fund is one of the bottom of the pile, or a competently run fund with manager & investor interests aligned, then that investor is guilty of incompetence and is responsible for the consequences. In addition, the lack of alignment of interests is far more of an issue in the mutual fund industry, since managers there rarely have much of their own net worth in the fund. Why focus on hedge funds where this is far less of a problem, and only applies to rich people with advisers and resources, compared to mutual funds which target naive ignorant retail investors who have far less ability to spot these traps? P.S. you didn't explain how Buffett taking 25% of outperformance is "immoral".
not quite. you hear a similar argument when someone from management sells a substantial amount of stock but he still hold a significant amount. the news will emphasize what he has left. if he sold $40 M it doesn't make a difference that that he has 60m or 80m left. he got his nest egg.