http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months en-us 40 Most recent comments for Hedge fund industry cut in half in 6 months! <p>its, not it's, sorry. One of my pet peeves, can't believe I was guilty of it.</p> http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105749 http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105749 <p>Interestingly, I think both sides of this hedge fund debate are (at least somewhat) right. As I mentioned way above, I agree that there are some managers that are so damn good that they deserve their 2 and 20, or even more, in some cases. In fact, happyrenter must think he is one of them, or will be become one, since he runs his own fund. However, I also agree that those few are the exceptions, with most managers swimming without bathings suits, as has been pointed out. The exceptions who are truly good will survive the shakeout. The vast majority of the naked swimmers will not.</p> <p>Incidentally, that original purpose of this thread, and it's tie to NYC RE, was not damning the entire hedge fund model, but simply stating that the numbers of well-earning managers will be greatly reduced. Sounds to me like everyone on this thread agrees with that.</p> http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105748 http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105748 <p>you are way wrong about all funds being self-reported. signed, hedge funder</p> http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105672 http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105672 <p>Recall that with 1000 orangutans flipping coins a certain number will flip heads 10 consecutive times just by chance!</p> <p>They undoubtedly will claim that their 2% and 20% fees are quite reasonable.</p> <p>I'm comfortably skeptical.</p> <p>Most hedge fund investors, of course, will trail what they could have earned with a good balanced account with very low fees. </p> http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105671 http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105671 <p>or rolled it up and smoked it</p> http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105669 http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105669 <p>if you'd buried your money under your pillow you'd be even happier. so...</p> http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105668 http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105668 <p>no silly goose, but if you were invested in leverage finance as part of your total portfolio, these were some of your choices. if you chose #7, you wouldn't be as unhappy you could have been</p> http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105664 http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105664 <p>that's the universe of possible portfolios, ok.</p> http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105661 http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105661 <p>However, if you had a bunch of jake to invest in a diversified portfolio of the following industry groups in calendar year 2007 and 2008:</p> <p>1. portfolio of commercial banks <br />2. portfolio of insurance companies <br />3. portfolio of monoline insurers <br />4. portfolio of investment banks <br />5. portfolio of finance companies <br />6. portfolio of mortgage companies <br />7. portfolio of hedge funds</p> <p>which would you have been happier with?</p> http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105654 http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105654 <p>anyway, it seems to have stagnated into a debate between me and a bunch of guys who think that -58% in assets is a great year, so i'm withdrawing from the field.</p> http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105642 http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105642 <p>garelj,</p> <p>i hope you are kidding me by saying that with hedge funds you only get paid if you do well. that's simply not how the model works. you get a share of profits on any returns above zero. you get a management fee no matter what the returns. it is an enormously lucrative model for managers.</p> http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105640 http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105640 <p>modern,</p> <p>apparently you have little or no familiarity with the madoff situation, and i must say that your over-awe at any and all famous hedge fund managers is not the sign of a seasoned industry veteran. the majority of madoff assets were through feeder funds. a fund of hedge funds is presumed to invest in....hedge funds, no? Fairfield Greenwich and Tremont alone had over $10 billion with maddoff. so please don't try to tell me that the utter disappearance of these assets has no impact on reported hedge fund returns. madoff was not a hedge fund, but the majority of his assets were through these funds of funds and the individuals who made those investments in tremont, fairfield, et al sure thought they were in hedge funds.</p> <p>but the larger point is that, again, black box investing is absolutely crazy. the madoff scandal was enabled by black box investing, and as you keep saying, again and again, the hedge fund industry runs in significant part on the black box model. yes it's important to have an auditor, but then, madoff had an auditor. so you add the stipulation that it should be a good auditor. i agree. but madoff was investigated and cleared by the sec. even short of more massive fraud (which is probably out there) there is all sorts of borderline-fraudulent activity out there. </p> http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105639 http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105639 <p>And a comment on "self-reported" returns. Yes, they report unaudited returns monthly. But the annual returns are audited so any fund that has been in business for more than a year, those returns have been audited by an outside auditor. And almost all funds now use outside administrators, who value assets and report returns monthly to investors.</p> <p>Never, ever, invest in a hedge fund without a well-known outside auditor and an independent administrator. UBP, a victim of Madoff in their FoFs, has said they wil redeem from funds without one (closing the barn door a little late).</p> http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105635 http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105635 <p>I think most of the hedge fund disasters have been the recent funds started by ex traders from big name firms who raised billions to start (mostly from FoFs), and had little of their own money in the funds. The great funds usually were started with small amounts of capital and attracted more with results, not marketing. I met Dan Loeb when he was a one or two person shop in the old Bear Stearns hedge fund hotel at 230 Park, I think he had well under $100 million back then. He now has billions of AUM and probably hundreds of millions of his own funds, so it tends to sharpen your risk managment skills when your own money is at risk.</p> <p>I suspect we go back to the old model, hedge funds will start small, and those that do well will attract capital. The days of billion dollar launches are over.</p> <p>And FoFs are pretty much toast. They never made much sense and their horrible performance this year has everyone running for the exits. (which is why even profitable hedge funds are getting redemptions). </p> http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105632 http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105632 <p>"3% of hedge fund assets in the world were just wiped out with the madoff scandal"</p> <p> - considering that HF's did not invest with Madoff (HNW individuals did) nor was he a HF so this an apples to orange conversation</p> <p>let's get the facts straight...</p> <p>oh yeah, if you have a bad year you dont get the 20...its funny cause the HF's have 10x more accountability than the banks / broker dealers do...you do well you get paid, you do bad you dont...your a bank / broker dealer well you know the answer</p> http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105629 http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105629 <p>S K: The real issue with swimming with no bathing suits, is the investors, not the managers. Ignorance and greed is a nasty combination. Just ask Madoff's victims. They will all tell you they were one of the two, or they are liars. The managers were simply not as good as they thought they were, greedy, or both. Remember, there were exponentially more dollars NOT given Madoff, that took a pass, than those that were given. </p> http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105624 http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105624 <p>modern and patient, i agree that you will pay fees for managers that truly deliver uncorrelated and consistent absolute returns. whether or not fees should come down over time because current managers (even good ones) are overpaid is another issue altogether. but my issue is that this year, the tide went out and guess what - 80% of managers were not wearing bathing suits! It begs the question as to whether many managers were simply dressing levered beta up and calling it alpha and quite frankly, whether many managers were fit to manage money at all much less earn 2 and 20 doing so. </p> http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105623 http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105623 <p>modern: 2 and 20 is cheap for a manager with a proven track record. On the other hand 6% is expensive for an uneducated waiter looking for a better gig</p> http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105615 http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105615 <p>"and he still hasn't responded to my point that 3% of hedge fund assets in the world were just wiped out with the madoff scandal."</p> <p>I give up. You are clueless about even the basics of hedge funds. Madoff was NOT a hedge fund and most of the losses were individuals who directly invested with him or through fund of funds, which are also NOT hedge funds. </p> <p>And if you were in the hedge fund industry, you would have access to many hedge fund numbers, such as Third Point, Greenlight, and others, and you would see how well they have done over many years. Since you don't have their numbers, I have to assume you are not in the business, and are just making up stuff.</p> <p>Greenlight Capital (David Einhorn) was down 22% this year. Bad, huh, what a loser, right? How about the 12 previous years of profits (net of those high fees you hate), so over the last 13 years his annual average returns are 21%. He beat the S&P 500 every year but one. That is 21% annually compared to the S&P500 index funds you are recommending of 4.3%. So early Greenlight investors are up 985% versus the S&P 500 up 72%.</p> <p>Yup, no way he deserves to charge 2 and 20 for that kind of crappy performance.</p> http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105613 http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105613 <p>Three points on private equity:</p> <p>1) Totally true that self-reported returns are much higher than "actual" returns. Mark to market is one reason, but the bigger reason is just different ways to slice the numbers - GPs will always find complicated methodologies that make themselves look better. I've seen this firsthand multiple times. CALPERS-reported returns are considered the accepted industry metric (I think CALPERS is the biggest PE investor), and, as far as I know, are pretty accurate. </p> <p>2) However, I think happyrenter's point about college endowments is wrong. Unlike hedge funds, carry in PE is only paid upon sales of investments, NOT on any hypothetical reported values. I don't believe there are any exceptions to this, even if I am wrong, they would be very, very rare. In many cases, you don't get ANY carry until you sell enough investments in the entire fund to assure that the carry is earned. In the cases where you get carry on every investment, there is (almost) always a clawback provision that you have to give it back if other investments tank, and the fund as a whole doesn't justify carry (which, by the way, is usually only paid if the fund return is over 8% after all fees).</p> <p>3) College endowments and other investors are, in fact, getting burned by their PE investments, but for at least 2 different reasons. </p> <p>(a) PE firms grew more and more aggressive, doing bigger deals and paying higher multiples with every year. When the music stopped, they had more money invested, at higher multiples, and with more leverage, than at any time in history. Will be tough to get any of equity value in those, let along getting out whole or making a profit</p> <p>(b) Many PE firms sold to other PE firms. That counted as realized profit, so the selling PE firm collected carry. But if you're an LP in both PE firms, you're still in the investment, at a higher basis, and just paid carry to "get" that higher basis without actually getting any cash. Hypothetically, two firms could repeatedly sell the same company to each other at higher and higher multiples, keep collecting carry on each deal, and when the music stopped, just say "oops". I don't think it's been quite that egregious, but you get the picture.</p> http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105439 http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105439 <p>Most of this discussion regarding returns relative to a benchmark assumes that hedge funds are either single strategy or equity biased. </p> http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105226 http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105226 <p>happyrenter, absolutely.</p> <p>The government will CLEARLY be sticking their nose into the business now, and America is not going to like what it sees...</p> http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105223 http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105223 <p>the point of it is.... here is how you can mimic the hedging strategies... but, in actuality, avoid the real thing, the 2+20% isn't worth it.</p> http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105220 http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105220 <p>don't get my started on private equity--even bigger scam than reported hedge fund returns. the college endowments are being absolutely destroyed by their PE investments. after paying their managers hundreds of million of dollars for these supposedly incredible private equity returns, they now discover that the returns don't exist. merry christmas.</p> http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105218 http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105218 <p>trying to find it. I actually get the print edition.... not sure if it made it online. </p> http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105217 http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105217 <p>nyc, do you have a lnk to that PE article? sounds interesting</p> http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105214 http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105214 <p>> 3% of hedge fund assets in the world were just wiped out with the madoff scandal. </p> <p>And lets not forget that hedge fund stats included the reported 12% returns (that never existed).</p> http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105209 http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105209 <p>They did a study of private equity returns (noted in same smartmoney article). They compared the self-reported stats to the actual redemptions and outflows and equity stake sales. Turns out the actual returns were SIGNIFICANTLY below reported.</p> <p>Its the mark to market problem. The assets that tank, they keep on the books for more than they are worth.</p> <p>But, not for long... government is going to break up the scam...</p> http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105208 http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105208 <p>right--those self-reported returns modern seems so enamored of. and he still hasn't responded to my point that 3% of hedge fund assets in the world were just wiped out with the madoff scandal. how's that for returns?</p> http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105184 http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105184 <p>didnt Bernie MAdoff also have "great long term records?"</p> <p></p> http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105179 http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105179 <p>modern,</p> <p>you keep telling us that we have no way of knowing hedge fund returns so we should assume they are great? what i know is that hedge fund assets are down 58% in one year despite the locked up capital at many funds. this is a sign of a thriving industry? why am i supposed to believe that hedge funds did so much better than the S and P this past year if, as you point out, the returns are not reported to any database? this is just nonsense.</p> <p>hedge funds are a compensation scheme, not an asset class or a type of investment. dan loeb is, by all accounts, a very talented investor. so is bob goldfarb (who runs a hated mutual fund and private accounts). the question is not whether there are some talented hedge fund managers. the question is whether it is a good bet that paying out 2% of assets and 20% of profits every single year is a good way to generate high returns over a long period of time. is it possible? probably is. is it likely? obviously not.</p> http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105178 http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105178 <p>By that logic, hedge funds should have done worse than the S&P 500 this year, not better.</p> <p>Does anybody here know more than they read on the web about hedge funds? Like, actually, invest in them? </p> <p>Does anybody think David Einhorn's returns for the last 15 years were just luck or leverage? Dan Loeb? Richard Perry? They all lost money this year, they all have great long term records, and none of them report their returns to any database (so reporting bias is not just to the downside).</p> http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105172 http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105172 <p>once and for all... the outsized hedge fund ("HF") returns were nothing more than a ponzi scheme based on greater liquidity. One hedge fund out of 1000, makes above market returns in 1999... (statistically insignificant).. .then junior partner goes I can do this... leaves and starts hedge fund 2... hedge fund 2 gets greater returns by employing the same trading strategy as HF 1 (their returns are highly correlated as they are the two buyers bidding up the same trading strategy)... then junior trader at HF 2.. "f" this I wantz me 2/20... goes start HF3... with the same trading strategy... as long a Banks/Funds give more liquidity into this nonsense... HF grows like mushrooms in a damp cave in Hawaii... They continue to generate above market returns as they employ same HF strategy as HF1... DO YOU F"N GET IT... all you I'm smarter than W67th HF managers... it is a fool who mistakes their intelligence for the market....</p> <p>ayrton senna would be nothing if he drove for Hyundai.... </p> http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105140 http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105140 <p>not worthless at all. the hedge fund managers were unable to pick long positions any better than mutual fund managers. you think that tells us nothing about their overall talent as managers? come on. as you rightly point out, it is virtually impossible to get unbiased information on hedge fund returns. and you think the takeaway from that fact should be that returns are great?</p> http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105130 http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105130 <p>happyrenter,</p> <p>that study you linked was insane. they looked at quarterly holdings of long positions only! they had no access to short information or anything that happened between quarters. worthless.</p> http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105104 http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105104 <p>NYC - if I do, can I have some TARP money? </p> http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105079 http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105079 <p>BTW, the article itself was the "create your own hedge fund" cover piece from last month. <br />Yes, ironic...</p> http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105043 http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105043 <p>> First you said it compared them to the S&P, now you are saying it was to their benchmarks</p> <p>Yes, and the major benchmark was the S&P. Ones that used other classes were compared to indexes there. <br />Its really not that hard....</p> <p>> I'd really like to know how they got hedge fund returns that weren't reported. Do you know? </p> <p>They looked at holidings over time and did the calculations themselves.... including inflows and outflows...</p> <p>I'll go look for the article.</p> <p>Seriously, is there a reason you are so bitter here? </p> http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105041 http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105041 <p><a href="http://www.businessweek.com/investing/insights/blog/archives/2007/03/hedge_fund_retu.html">http://www.businessweek.com/investing/insights/blog/archives/2007/03/hedge_fund_retu.html</a></p> http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105040 http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105040 <p>here is one of the studies. it's not particularly good because of the reporting rules you mention above, but it shows that hedge funds' long picks are very slightly ahead of mutual funds' before fees, so obviously would be significantly worse after fees.</p> http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105039 http://streeteasy.com/nyc/talk/discussion/7662-hedge-fund-industry-cut-in-half-in-6-months?comment_id=105039