I don't agree re: "people that decide to invest with you if you charge them 1+15 would most likely have invested if you charged 2+20 anyway"
Espeically in the CTA space - there has been a proliferation of established, multi-billion managers (in Europe - GSA, Cantab, or US - AQR) who (and their motivations are different as to why they do this) launching low fee versions of what they do.
They're been very good at going to some pension fund trustees - and getting investment.
Those trustees are approaching other managers it likes now - and saying that we'd love to diversify into a basket of 3-4 CTAs - but given fees they can't justify it
Yes - they should look at net performance -and that's all that matters - but they don't - and use BS such as what their members get paid. Happens from state (Superannuation in Aus) pension plans too.
And yes - if you hold tight, some investors do walk away (some back down too of course...)
Incentive/Profit Fees Crystallization Frequency
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HitmanH
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TSWP
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svisstack,
what I mean is that the hedge fund industry as we know it has been around for only ~20 years, so it's a bit hazardous to say that the classic 2/20 fee structure is here to stay forever.
hitman, thanks for the note about lower fees for pension funds, that is definitely an investor I target, good to know!
what I mean is that the hedge fund industry as we know it has been around for only ~20 years, so it's a bit hazardous to say that the classic 2/20 fee structure is here to stay forever.
hitman, thanks for the note about lower fees for pension funds, that is definitely an investor I target, good to know!
The only thing that counts: can you make money?
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RFMontraz
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@ HitmanH
I believe that at the heart of our disagreement there is a fundamental misunderstanding about the purpose of this thread.
If the purpose was "if I were a multi-billion fund manager what sort of fee structure should I apply and what are the pros and cons" then ok, we can talk about what Winton or Cantab do to attract more assets, how Citadel pays the bonuses to its traders and of course (because no such discussion will ever be complete without it) of Rentec Medallion and its humongous fees. We can go on for hours dropping off names and trivia of famous billionaire which most likely we do not know personally (I for one certainly don't) but to me this looks like the people that, ice-cream in hand, take a stroll down at the Monaco harbour to stare at 60+ meters yachts before jumping back on their Panda and go home.
In my understanding in this thread TSWP was asking about what fee structure should he apply to his own HF start up, if it ever gets off the ground. I wish him all the success in the world as he comes across as a very nice person but let's face it, this is not going to be Eton Park (name dropping is alive and well) or we would not be discussing it here. Either I am the biggest loser/pessimist ever or the only pragmatist left but it's time for me to say it: no pension fund will invest (consider yourself lucky if you get a meeting and a free Evian), so their preferences are hardly relevant. If you launch with more than 50M you will be my hero. Goldorak said that most HFs have 200M like it's a pittance and that's insane, there is a 0 too many in that number. Most HFs (and CTAs) have a few millions and most close doors within a couple of years. Many (certainly more that the multi-billion fund structures constantly mentioned here) do not even get to open their doors. It seems there is a disconnect between reality and fantasy, where all of a sudden the gods (and their luck) are the benchmark to beat and gazillions are just waiting around the corner - and where pension funds invest in start ups because they pitch lower fees.
Sorry gotta jump now, I have Swensen on hold on line 2...
Wink
I believe that at the heart of our disagreement there is a fundamental misunderstanding about the purpose of this thread.
If the purpose was "if I were a multi-billion fund manager what sort of fee structure should I apply and what are the pros and cons" then ok, we can talk about what Winton or Cantab do to attract more assets, how Citadel pays the bonuses to its traders and of course (because no such discussion will ever be complete without it) of Rentec Medallion and its humongous fees. We can go on for hours dropping off names and trivia of famous billionaire which most likely we do not know personally (I for one certainly don't) but to me this looks like the people that, ice-cream in hand, take a stroll down at the Monaco harbour to stare at 60+ meters yachts before jumping back on their Panda and go home.
In my understanding in this thread TSWP was asking about what fee structure should he apply to his own HF start up, if it ever gets off the ground. I wish him all the success in the world as he comes across as a very nice person but let's face it, this is not going to be Eton Park (name dropping is alive and well) or we would not be discussing it here. Either I am the biggest loser/pessimist ever or the only pragmatist left but it's time for me to say it: no pension fund will invest (consider yourself lucky if you get a meeting and a free Evian), so their preferences are hardly relevant. If you launch with more than 50M you will be my hero. Goldorak said that most HFs have 200M like it's a pittance and that's insane, there is a 0 too many in that number. Most HFs (and CTAs) have a few millions and most close doors within a couple of years. Many (certainly more that the multi-billion fund structures constantly mentioned here) do not even get to open their doors. It seems there is a disconnect between reality and fantasy, where all of a sudden the gods (and their luck) are the benchmark to beat and gazillions are just waiting around the corner - and where pension funds invest in start ups because they pitch lower fees.
Sorry gotta jump now, I have Swensen on hold on line 2...
Wink
Was it worth it?
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HitmanH
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Maybe I broadended it up to a more general discussion of fee structuring in the industry right now
As experianced by a sub $1bn firm, but hey, I also think that I'm you're your hero
As experianced by a sub $1bn firm, but hey, I also think that I'm you're your hero
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Scotty
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Awesome input RFM even I don't agree with all of it.
On an iPhone from a beach in the Maldives so I won't elaborate too much, however here are a couple of thoughts...
Perhaps an inflexible approach to HF fee structures makes it difficult for small hedge funds to survive long in a world that has much higher expectations for necessary infrastructure, people, processes than before. How about a mgt fee that scales with actual costs in a transparent way? A higher % at smaller AUM would help the small funds survive and a fee decreasing in AUM may mitigate the asset gathering that goes on in the larger funds.
With respect to investors my view is that they are clients not trading counterparties. We should be trying to work with them to find dimensions of a risk reward profile that works for them rather than seeing what we can get away with in an apparent win-lose situation. I acknowledge AndyM's point that institutional rigidities make this hard for certain investor types, but that doesn't mean you shouldn't try.
Finally, on the performance fee I'm sure there are alternatives to 20% of the upside that make both the investor and the hedge fund manager better off.
Anyway back to the bar...
On an iPhone from a beach in the Maldives so I won't elaborate too much, however here are a couple of thoughts...
Perhaps an inflexible approach to HF fee structures makes it difficult for small hedge funds to survive long in a world that has much higher expectations for necessary infrastructure, people, processes than before. How about a mgt fee that scales with actual costs in a transparent way? A higher % at smaller AUM would help the small funds survive and a fee decreasing in AUM may mitigate the asset gathering that goes on in the larger funds.
With respect to investors my view is that they are clients not trading counterparties. We should be trying to work with them to find dimensions of a risk reward profile that works for them rather than seeing what we can get away with in an apparent win-lose situation. I acknowledge AndyM's point that institutional rigidities make this hard for certain investor types, but that doesn't mean you shouldn't try.
Finally, on the performance fee I'm sure there are alternatives to 20% of the upside that make both the investor and the hedge fund manager better off.
Anyway back to the bar...
“Whatever you do, or dream you can, begin it. Boldness has genius and power and magic in it.”
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TSWP
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The discussion on this thread has been great and very helpful, RFMontraz you have brought a reality check and that is good - I like the analogy of walking with an ice cream watching boats in MonteCarlo and then driving away in a Panda, in a way it feels a bit like that...
So, trying to sum up everything, coming up with a proposal, what would you gentlemen say of this fee structure:
1.5%-to-2% fixed yearly management fee
20% incentive fee but charged only on the portion of the profits that actually beat the benchmark (example if I make 10% returns and the benchmark makes 11% return, I charge NO incentive fees).
crystallization frequency: yearly
lock-up period: yearly
Rationale:
*Fixed fee is the bread and butter of the manager, hard to do without, and in the end investors have to pay those type of fixed fees also to go with mutual funds, so I think it's OK to keep it like that.
*Incentive fee is where I am going to be called a moron by other managers, however, I think the investors should be happy to pay 20% only when I beat the market, and pay no incentive fees when I do not beat the market. It would be good to speak to some investors and see what do they think of this: will they still leave me at the first year of under-performance if they know they won't be charged a 20% incentive fee?
*Lock up periods and crystallization unfortunately can't find a valid rationale because they inevitably favor the manager OR the investor, so let's find a meeting point: you stay with me at least 1 year and I will charge you at the end of each year (fixed fees actually charged monthly, but incentive fees yearly, at year end).
Comments welcome... thank you gentlemen.
So, trying to sum up everything, coming up with a proposal, what would you gentlemen say of this fee structure:
1.5%-to-2% fixed yearly management fee
20% incentive fee but charged only on the portion of the profits that actually beat the benchmark (example if I make 10% returns and the benchmark makes 11% return, I charge NO incentive fees).
crystallization frequency: yearly
lock-up period: yearly
Rationale:
*Fixed fee is the bread and butter of the manager, hard to do without, and in the end investors have to pay those type of fixed fees also to go with mutual funds, so I think it's OK to keep it like that.
*Incentive fee is where I am going to be called a moron by other managers, however, I think the investors should be happy to pay 20% only when I beat the market, and pay no incentive fees when I do not beat the market. It would be good to speak to some investors and see what do they think of this: will they still leave me at the first year of under-performance if they know they won't be charged a 20% incentive fee?
*Lock up periods and crystallization unfortunately can't find a valid rationale because they inevitably favor the manager OR the investor, so let's find a meeting point: you stay with me at least 1 year and I will charge you at the end of each year (fixed fees actually charged monthly, but incentive fees yearly, at year end).
Comments welcome... thank you gentlemen.
The only thing that counts: can you make money?
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HitmanH
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On the lock - investors will HATE a hard lock - if you trade liquid assets
Although they are sensible that you have to run a business, and care about stability etc - hence make it a soft lock (fees) - and charge somewhere between a quarter and a year's management fee (dependant on how long they've been in) - From my experiance - they understand that...
Although they are sensible that you have to run a business, and care about stability etc - hence make it a soft lock (fees) - and charge somewhere between a quarter and a year's management fee (dependant on how long they've been in) - From my experiance - they understand that...
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TSWP
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OK, thank you, understood.
I plan to trade only liquid assets (Futures and FX Spot), low-to-midfrequency, so if I change the lock-up system then I probably want to re-think the crystallization frequency because that was a trade-in: in change of the 1 year lock up period I offer the investor-favorable 1-year crystallization, but if the investors prefers to leave at any time (at the cost of a small exit fee), then I need to lock in the incentive fees more frequently (assuming the investor will leave when we are under-performing so I cannot charge any incentive fee at that point).
I plan to trade only liquid assets (Futures and FX Spot), low-to-midfrequency, so if I change the lock-up system then I probably want to re-think the crystallization frequency because that was a trade-in: in change of the 1 year lock up period I offer the investor-favorable 1-year crystallization, but if the investors prefers to leave at any time (at the cost of a small exit fee), then I need to lock in the incentive fees more frequently (assuming the investor will leave when we are under-performing so I cannot charge any incentive fee at that point).
The only thing that counts: can you make money?
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RFMontraz
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Sorry to keep repeating myself, but the "if ain't broken don't fix it" applies here. Make it more complicated and you will have any sort of unintended consequences. For example regarding Scotty's suggestion, my obvious thought as investor is "sounds great call me back when your AUM exceeds X then", which would get you in a horrible Catch-22 situation.
Lock-ups are "the horror the horror" and a conversation stopper. Who cares if you charge 50 bps a year less when I cannot get my money back? Or course you can hide in the offering document gates provisions (they are pretty much standard) hoping people won't notice/ask, but that is a completely different story.
Also - just for clarity, do not want to be pedantic - lock ups and crystallization frequency do not go together: with yearly crystallization frequency if an investor redeems after one month, he will still owe you performance fees (if any are due), which will be accounted for with equalization credits or series shares depending on the structure etc... so I don't see an obvious trade off there.
Finally TSWP, noble ideals on the side, you are talking about running a business and trading is the easy part: so unless it's a de minimis set up which costs you (actually costs the investors) 50K a year, a one man band that trades from the living room and only needs a BBG (and there is NOTHING wrong with that) ok waive the man fees, do whatever you think it's more commercial, downside is limited, you can experiment; but if you are talking about a real office with people inside (as it seems the case given the pension fund comment) you need to calculate your cash flow and working capital well, like in any other business. It will cost you hundreds of Ks every year to run the gig, and this for a modest set up which will not make so you proud when receiving investors. That's why I would think twice before being so cavalier about fees, that's all.
Edit [for a further reality check]: I went to dig up a presentation I received last week, from a friend of mine. Proper HF structure, based in London. Bunch of traders, staff, road show in US etc.. very credible. Starting capital 30M USD (with the M, all their own) operational capital 8M locked up for 4 year. VERY impressive numbers, especially the second one (it means 8 USD of own money to be dedicated to make sure the firm keeps being around in absence of fees). So, lots of "interests" received during road show. Actual outside capital raised? I think zero. Did I give money myself (not that I count for shit anyway)? No. Why? No track record (at the actual fund, no cares about unaudited banter from IB days), no party. As Bon Scott sang, "it's a long way to the top if you wanna rock and roll..."
Lock-ups are "the horror the horror" and a conversation stopper. Who cares if you charge 50 bps a year less when I cannot get my money back? Or course you can hide in the offering document gates provisions (they are pretty much standard) hoping people won't notice/ask, but that is a completely different story.
Also - just for clarity, do not want to be pedantic - lock ups and crystallization frequency do not go together: with yearly crystallization frequency if an investor redeems after one month, he will still owe you performance fees (if any are due), which will be accounted for with equalization credits or series shares depending on the structure etc... so I don't see an obvious trade off there.
Finally TSWP, noble ideals on the side, you are talking about running a business and trading is the easy part: so unless it's a de minimis set up which costs you (actually costs the investors) 50K a year, a one man band that trades from the living room and only needs a BBG (and there is NOTHING wrong with that) ok waive the man fees, do whatever you think it's more commercial, downside is limited, you can experiment; but if you are talking about a real office with people inside (as it seems the case given the pension fund comment) you need to calculate your cash flow and working capital well, like in any other business. It will cost you hundreds of Ks every year to run the gig, and this for a modest set up which will not make so you proud when receiving investors. That's why I would think twice before being so cavalier about fees, that's all.
Edit [for a further reality check]: I went to dig up a presentation I received last week, from a friend of mine. Proper HF structure, based in London. Bunch of traders, staff, road show in US etc.. very credible. Starting capital 30M USD (with the M, all their own) operational capital 8M locked up for 4 year. VERY impressive numbers, especially the second one (it means 8 USD of own money to be dedicated to make sure the firm keeps being around in absence of fees). So, lots of "interests" received during road show. Actual outside capital raised? I think zero. Did I give money myself (not that I count for shit anyway)? No. Why? No track record (at the actual fund, no cares about unaudited banter from IB days), no party. As Bon Scott sang, "it's a long way to the top if you wanna rock and roll..."
Was it worth it?
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svisstack
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>> No. Why? No track record.
I will quote @Tradenator post from other thread (https://nuclearphynance.com/Show%20Post.aspx?PostIDKey=177812).
@Tradenator "PhDs are a good marketing asset."
So probably they have not enough PhDs on board.
ehuaeuha
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Great post anyway, probably one of very few people here with usable practical knowledge about shit.
I will quote @Tradenator post from other thread (https://nuclearphynance.com/Show%20Post.aspx?PostIDKey=177812).
@Tradenator "PhDs are a good marketing asset."
So probably they have not enough PhDs on board.
ehuaeuha
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Great post anyway, probably one of very few people here with usable practical knowledge about shit.
Time well wasted.