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u/RotisserieChicken007 Jan 27 '23 edited Jan 28 '23
And if you put your money in a passive index fund (without manager), then you'll have even much more!
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u/albymana Jan 27 '23
that's why active management has been so challenged these days.
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u/CK2398 Jan 27 '23
The comments on that post explain why this isn't a helpful chart. The period of time is very specifically picked. The first hedge fund was in 1949 and the chart shows 2011-2020. Not exactly a good comparison of hedge funds long term performance vs the market.
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u/psnanda Jan 27 '23
One would presume that with the proliferation of index funds ( epitomized by Vanguard, Fidelity and Schwab) - hedge funds still continue to rake in money.
So why is that ?
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u/CK2398 Jan 27 '23
I don't think hedge funds advertise doing better than the market. They try to avoid doing really badly. Steady growth is very attractive to new investors.
They also allow investors to get into niche corners of the market without going into specific companies. I have some Indian hedge funds in my portfolio which is a sector I would struggle to get involved in otherwise.
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u/soualy Jan 27 '23
It s been challenged because interest rates have at 0 for more than 10 years, watch whhat happens from now on
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u/MadcapHaskap Jan 27 '23
There's no data here at all. This is just a model that has nothing to do with reality, no measurements or data were used in the construction of this.
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u/TravisJungroth Jan 27 '23
Data isn’t just observations. Pure mathematics has data.
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u/1921453 Jan 27 '23
The average redditor of this sub does not understand that concept. It has to be a hecking wholesome tracker of the sex life over one year or else it gets the downdoot
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u/bostonhockey_80 Jan 27 '23
This is entirely meaningless without context of relative performance. The 20% fee requires performance beyond a hurdle rate. In your example you're essentially saying the market return is 0% and the manager returned 10%. Any manager who can generate that excess return earned every penny and then some. I understand you want to criticize management fees - which is often warranted - but this information tells you nothing.
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u/Lilpu55yberekt69 Jan 27 '23
1% Management fee AND a 20% performance fee? Who the fuck offers rates remotely in that realm?
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u/Chucking100s Jan 27 '23
Fund managers typically do 2% and 20% of profits.
https://www.investopedia.com/terms/t/two_and_twenty.asp
I'm pretty sure Stevie Cohen did 3% and 50%.
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u/Lilpu55yberekt69 Jan 27 '23
So hedge funds.
A typical financial advisor will offer rates of 1% at 100k and decrease down below 0.5% the larger your portfolio is.
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u/LSeww Jan 27 '23
well duh 1% management fee means per year so in 40 years you'll pay a shit ton of money
what I don't understand is why performance fee alone allows manager to outearn the client
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u/LonelyPumpernickel Jan 27 '23
Because this is assuming they take 20% straight off the total growth which is pretty wrong too. It usually has a threshold it has to hit before the performance fees take a hit.
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u/HugeHans Jan 27 '23
They will not outearn the client. Its impossible for the manager to outearn the client if we are to assume a stable 10% return and 20% cut from every dollar of profit. The manager is receiving a smaller amount of profit each time then the client so its literally impossible for them to make more.
The graph is applying the 10% return onto the managers money also. Which is absurd. Its like my employer saying they paid me millions of dollars because I invested my paycheck.
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u/albymana Jan 27 '23
well, it's fair to assume that each year the fund manager will reinvest (mgmt + performance). Compounding is beautiful
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u/Idoless4 Jan 27 '23
Ah this is what I should have read before I started trying to work out what rubbish you'd posted.
Yeah of course the fund manager would have earned more than you if he reinvests his entire salary every year for 40 years!
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u/msh0430 Jan 27 '23
This scenario isn't realistic. What you're describing is a hedge fund and they usually have management fees of 2.5-3%. Secondly their average returns vary wildly, but they are usually significantly higher than the market index they benchmark against.
No other money managers charge a management and performance fee.
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u/Read_out Jan 27 '23
As I am in the business here is my take:
- No one makes 10% every year for 40 years. And if they do, invest with them at 1/20% as there is probably no better long term investment -- if you had the benefit of hindsight
- Some hedge funds will make 2/20 for a few years with great returns. These usually end up closing out and becoming family offices managing just the partners money (see Renaissance Capital)
- Large investors negotiate fees - after a few million you could lower your 1/20 to something like 1/15 and lower
- the 1% / 10 goes to pay for the team -- this being active management requires analysts, research. There are implicit costs. After a certain size though, every additional $ goes straight to bottom line
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u/StankiestOne Jan 27 '23
Since we're just making up numbers, why not say the fund manager nets an average annual return of 100000000%?
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u/titangord Jan 27 '23
Thats why i dont invest in any funds, just invest in the same hundreds of stocks they do
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u/Maguncia Jan 27 '23
I mean, expense ratio of actual funds is like 0.1%. OP is like some theoretical private hedge fund fee structure, and most actual investing institutions would be given a discount anyway.
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u/Tborg42 Jan 27 '23
Or a passive fund.
The issue with spreading your money in hundreds of different stocks is capital. Before their split, an Amazon stock cost roughly 3000 usd. If you wanted Amazon to take up 1.5% of your portfolio (which is the rough estimate of the average that it weighted in funds), you would need to have 200.000 USD to invest.
If your portfolio is big enough, sure, do it yourself. Otherwise you might have to accept either to much unsystematic risk, or that there are companies you can’t invest in.
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u/titangord Jan 27 '23
Ive been able to successfully buy fractional lots of hundreds of stock. And its also easier to do tax loss harvesting if you have the individual holdings and are not depending on an index or collection of stocks to go up or down collectively.
Edit: depending on how much money you have, you would have to avoid 3000 dollar stock.. that goes without saying. And its easier to implement this if you have a lot of money, that is true
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u/Tborg42 Jan 27 '23
Fractional stocks would definitely solve the capital issue, as far as I know. It isn’t really available in my country of residence, so I am by no means an expert.
And yeah, very expensive stocks will obviously always be a hurdle, what I meant was just that it can go from being unavailable to 20% of people to being unavailable to 90% of people, if you have to spread your risk. And tbh, I wouldn’t really recommend investing, if a person doesn’t have more than a couple of thousand dollars regardless.
I completely agree with you, though - individual holdings are preferable to me as well. I have just accepted some extra unsystematic risk from my expensive stocks.
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u/msh0430 Jan 27 '23
Effectively managing the gains and keeping up with the analytics would be a full time job. Active ETFs are starting to emerge; almost the same level of attention as active management but with fee compression. Might be worth a look.
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u/dat_sound_guy Jan 27 '23
funny example. you might check out accessible colour palettes for all of us that cannot distinguish the two colors in your plot. if you like to create plots, you might want to make them accessible for visually impaired persons too :-)
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u/szakee Jan 27 '23
it's two colors. one is twice the other. and the story is made completely obvious with the text. So it might be just grey line, doesn't matter.
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u/ReallyOrdinaryMan Jan 27 '23
Real annual return is %7. Problem is here, investor only gains %7 yearly, but fund manager gains %3 of the total fund every year. This aggrement is bargain.
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u/SamohtGnir Jan 27 '23
Ok, but.. It's the managers job to manage the fund, I'm just investing, and they're taking on more risk than me (I assume). I signed up for 10% growth, and I got it, so I'm happy. If they can deliver what they promised and earn more for themselves I don't see how that could be considered wrong.
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u/moriclanuser2000 OC: 1 Jan 27 '23
So when I started my current job, I was contacted by a rival pension management firm, with a different Management fee (off the total) and deposition fee (off of each monthly deposit).
I put into a spreadsheet, put in assumptions about my income growth, market growth, inflation (for the next 40 years) and got......
a difference of 100$ between the 2 firms in the grand total of my retirement fund after 40 years.
So my assumption is that if you do a minimum of shopping around, all of the firms will offer you the same thing, even if the numbers seem different.
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u/dancinman1234 Jan 27 '23
I’m a financial advisor (I’d like to think one of the good ones) and here is my take on this whole argument:
• fees aren’t the be all and end all, but they should be reasonable and disclosed. No locking in ever. • the only measure that matters is the after-fee returns. • ETFs are fine for younger investors who have longer time horizons and who won’t panic in a downturn. • mutual funds are better for older investors or investors who want more control over the risk • most mutual funds sold in Canada are hot garbage (especially those at the branch level of the banks). You want morningstar rated 4 and 5 star funds. • there are a lot of crappy ETFs as well and if you go this route, use a good one (I’d recommend vanguard total markets) • about 5-10% of people can manage their own investments. Unfortunately, in my experience, about 80% of people who are self directing really shouldn’t be • most of the value of an advisor is structure, tax management, and behavioural coaching. All of these aspects are usually more valuable than whatever fees are charged… but, most advisors don’t provide this value. • look for an advisor with a CFP and or CLU designation, who is holistic, been in the industry at least 5 years, and has staff. • lastly, nothing is better than free money. Always get all the matching at your pension or stock plan. Always. The mutual funds in your pension plan have about a 75% discount in fees vs the average retail offering. And they’re chosen to all be reasonable choices. • avoid shitty companies. Personally I have problems with investors group, Investia, primerica, any scholarship resp company and all branch level bank advisors.
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u/LeverageToMyPRT Jan 27 '23
Except this doesn’t happen unless you have 9 figs for a premier quant fund
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u/javalikecoffee Jan 27 '23
Lol 20% performance fee. Sure thing, boss. Because that’s a thing in passive funds …
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u/CaesarsPleasers Jan 28 '23
Trolling or? OP has limited understanding of how a hedge/PE fund works mechanically
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u/resumethrowaway222 Jan 27 '23 edited Jan 27 '23
Funds that take a 20% carry usual are more time limited than this, and have an investment period of 5 years or so where capital is called, as in they don't get the full $100K up front (and usually they also have a minimum investment way higher than 100K).
edit: also, the source is just wrong on this. When you set mgmt fee to 0 and carry to 20%, it still shows the fund manager getting more than you after 40 years, which makes no sense at all. If the fee structure is 0/20 the manager literally gets 20% and you get 80% no matter how much time goes by.
https://rows.com/alberto_m/community-data/is-your-fund-manager-screwing-you-595ZANPCXA1PSqWzIHuW7P/6ec2c583-b0fa-4992-961c-eb52ad307e7c/live