I have thought about (3) above, but the problem is the managers would shut-down and start another fund once they have a losing year, so as not to carry forward any loss. But point (2) seems to fix it in those situations when the manager has good years prior to the loss. Great thoughtful recommendations that should be adopted in a rational world. Unfortunately, we do not live in such a world (as yet), and the operators will always find a cheap way out.
seems to me like most of your suggestions call for some type of regulation, then at the end you say regulation never works. I agree losses should not be socialized. however, what business is it of the goverment or quite frankly anyone but the parties involved how private partnerships or businesses choose to set fees? it absolutely is not. The clawback notion? that may be something for investors to negotiate over, yet should the government mandate it? I say absolutely not. I know I would never run a fund with this feature. The general partner is Already the one taking on the unlimited liability of the fund. THis alone is worth a great deal to the limited liability partners, and personally would be all the risk I would be willing to take on a fund under my management. If one is not able to adequitely assess the character and integrity of the manager to a reasonable degree, or is so blind to their strategy it is a "black box" and is willing to accept that, or if one is investing capital in such a fund that if lost it would make a real difference in the their financial situation, i call that person a fool. It is true many mutual funds are poor. However, the fact is, any return above the risk free rate on long term investments is a huge benefit for most people.. people who are not sophisticated, who quite frankly need to be talked into an long term investment, because if not that its all their life savings in a savings acount paying less than inflation. If an investment "walks" up to you, obviously there is extra cost involved.. why else would someone be selling it if it was not going to make them money? most people are too dumb and lack the foresight to plan and invest long term. Lets keep working on eliminating "the socialization of losses". Ruling that out as not possible is essentially giving up the whole game. Adding additional rules just creates new headaches and takes away more freedoms. at face value, they may seem to be common sense, yet they move us in the wrong direction. I guess i am a lot more positive about the nature of this industry an what it offers.
I disagree with this notion in particular: "make it compulsory for the fund manager to have 75%+ of his entire net worth in the fund." This may or may not be a good thing. But to actually believe the government should mandate this? just flat out ludicrous to me. the world will never be perfect, and I am afraid more rules will not make it so. just the opposite. it would kill competition and entrepreneurship in our industry.
Good stuff Cutten. I think #1 is the most basic, but it is the one I have complained about most over the years to people I know. If you go to www.iasg.com and simply compare the performance fees of some of these CTA's, Hedge funds, etc., you will find that some idiot who's been around for 6 months with mediocre results is charging the same as some of the seasoned veterans. William Ekhardt (among others) posts his results there on a regular basis, but many funds charge the same performance fees as his for sub-standard results. I've always thought that if I started a fund, I would charge something like a percentage of my gains over the % gain of the sp500 for the year/quarter, and maybe a small % to cover fees. But here's the other side of the argument: If you run a small fund, and you need to pay a lawyer, an accountant, and a small staff, you need to collect 2% just to cover expenses. And THEN you need to make some money for yourself by collecting % of the gains of the fund. I've never bought into this other side, and I've never understood why these supposedly brilliant young fund managers, managing 750 thousand dollars didn't simply go prop, and make themselves millions. If they have millions under management to start with, then how'd you raise it? you must have a track record of your own and money in the bank. I think the answer is obvious to all.
Response to Cutten: Those reckless gamblers you are talking about are banks, brokerage and investment banks, hedge funds, insurance companies, pension plans, etc. Todays sub-prime mess was caused by greed of all those banks that were selling packages of sub-prime loans. You sound like the mortgagee should do his own due diligence and tell the bank, "You know, if I were you I would not loan me the money for this mortgage, because I really am not a good credit risk". Not goanna happen! Banks are supposed to do their own due diligence. The reason they did not is because they were planning to sell these mortgages to other organizations. This took away their incentive to perform due diligence. It is no ones fault but the banking industry and the Federal Reserve for ignoring this problem for 3 years. The sub-prime mess was caused by banks putting together pools of sub-prime mortgages and taking them to other banks for loans. The Federal Reserve allows banks to borrow against sub-prime mortgage pools with only 10% equity. They can borrow 90% while putting up equity of only 10%. So when the values of these CDO's, SIV,s etc started to fall banks and brokerage firms that had pyramided their mortgages could not meet their margin calls. The Feds solution was to charge the cost of this to the American Taxpayer by way of bailing out Bear Stearns and allowing brokerages, hedge funds, etc to borrow from the discount window as banks are allowed to do. This attempt at supporting liquidity in the sub-prime market did not extend more credit to consumers. Indeed, banks have pulled by their credit extension because of their own mistakes. However, in the end we taxpayers will have to pay this bill. Because the Fed did not do its regulating job, we are paying the price by less credit availability resulting in lower GDP growth. This is not the fault of sub-prime borrowers but the fault of the organizations that created these types of investments. They are the ones who could not meet their margin calls, which the Fed is allowing the American taxpayer to meet. Just some food for thought! I enjoy reading your post. Keep it up. Marti
I completely disagree with that as well. If the fund's strategy is to take on high risk positions, and as long as the fund holders understand that, than large drawdowns are a very real possibility. In that case, any investor would be insane to have more than a small percentage of their portfolio in the fund in order to diversify. So why would you force the fund manager to commit suicide in his own fund if everybody knows it is a high risk based fund. Secondly, I also disagree with the statement about hedge funds. Hedge funds aren't supposed to outperform indices. They aren't supposed to be correlated with indices period. Thus they may or may not match the returns. The purpose of a hedge fund should be to decrease volatility in a portfolio, NOT to get exhuberant gains. But I would agree that the management fees in hedge funds are much too high though. Again, since I view hedge funds as being a way to diversify, paying outrageous fees defeats the purpose again.
a blast from the past: http://marketsurfer.blogspot.com/2008/06/victor-niederhoffer-interview-circa_15.html
According to professional who talk to oil traders everyday they say that "You know, when we talk to refiners and other industry contacts, they consistently come back and say without speculation oil would be in the $65-70 range today." http://www.iptv.org/mtom/story.cfm?Lid=1127 It is not logical for oil to be this high, except that traders only have to put up 2% of their own money and are allowed to borrow the rest. Speculators are coming out of the wood work according to articles I have read. Start a web site called "Friends of the Oil Companies" if you feel sorry for them. Thanks for your comments, Marti
funds do a wonderful job of convincing public that they need a professional to manage their money for a fee producing 5% ananual returns. some private hedge funds make 50% so the need for gov't regulations in fees is ridiculous. people who buy some funds like balance funds making 5% know they won't get rich and know they won't lose much if any. cause those funds are diversified and usually for 5 years or more ... the risky hedge funds producing 50% annually have more risk and for accredited investors so they know the fees and risk. i don't need the gov't how much a business can charge it's customers. the gov't can't even regulate market maniuplation and rampant fraud in the market