Hedge Funds Are Pocketing Much of Their Clients' Gains with 'No Limit' Fees
99 comments
·February 10, 2025barumrho
jfengel
There's a lot of friction. You won't switch based on one year, which would just leave you chasing last year's lucky winner (who will likely revert to the median next year). It takes a long time to realize that your hedge fund is a loser.
The whole point of a hedge fund is for you to let someone else do the worrying. So the market is decidedly inefficient.
chii
> It takes a long time to realize that your hedge fund is a loser.
it's been many decades since the existence of statistical analysis of hedge funds (as an aggregate) that demonstrates their lack of edge over benchmark passive index funds.
Some hedge funds would still out-perform. Most don't, and those who do tend to charge fees up to their level of edge, and leave only index-benchmark returns for their investors.
If you don't heed this evidence now, you deserve to lose money to these funds.
testval123
The purpose of a hedge fund is to ‘hedge’ ie deliver alpha and not index beating returns. Obviously the fee issue is another layer.
comboy
It's kind of like buying lottery tickets from a vendor and when you win, but he steals the winnings, you switch to another one.
Except, also, you don't actually ever see the tickets.
bushbaba
Depends on if there’s capital gains tax when leaving the firm.
financetechbro
Perhaps. But HF capital is usually locked down for a few years. So there is some friction to switching
ptero
True, but I believe (although last explored this question a long time ago) that the majority of the capital is not locked.
calmbonsai
Slow news day Bloomberg? Seriously, if you're investing in ANYTHING, and don't understand the prospectus or won't hire people to understand it for you, you're a fool.
They can charge whatever they want on these "pass-throughs".
The industry, just like post-return-management-clawbacks in the Tiger era (see Mallaby's "More Money Than God" https://amzn.com/dp/B003SNJZ3Y ) can get away with this precisely ONCE before "normalization" (as much as it's ever normalized) kicks in and these practices obviated.
asdasdsddd
1. Crazy graph format lol
2. I thought management fees were supposed to pay for comp?
3. Buying SPY wins again?
4. I don't really care about rich people getting ripped off, but I wonder if any of my money leaks into these funds
bberenberg
I think you need to consider time horizons when analyzing these funds. You can buy SPY and it will win. Unless there is a market crash when you hit retirement age, in which case you are screwed until the market recovers. If you don't mind the risk, go 2x levered and you will do even better. [0]
Many institutions and HNW and UHNW individuals prioritize consistency over absolute growth. They would rather make 6-8% a year and reduce downside risk than optimize for gains. Multi-strat funds like this one are catering to people who want that product.
[0] - https://citeseerx.ist.psu.edu/document?repid=rep1&type=pdf&d...
mgfist
2x leaves at the mercy of margin calls, which inconveniently come at the moment where you least want to sell (right after a huge crash). Getting margin called after a 50% crashes leaves you with $0, as an example.
A 50% market crash would be brutal even without leverage, but at least no one would force you to sell.
cj
You can achieve 2x leverage without the risk of margin calls by buying ETFs like SPUU (or SPXL, UPRO if you want 3x leverage).
unyttigfjelltol
... "permanently high plateau" and all that...
chongli
You have to pay interest when you invest on margin and a margin call can wipe you out. Investing on margin is serious riverboat gambling, not retirement saving.
asdasdsddd
I always see this "excuse". Our fund isn't focused on alpha; we minimize beta. It's just unclear to me whether this is shown out in the data.
ddmitriev
I think they usually say that they are focused on alpha while minimizing beta, i.e. don't compare us to the S&P or other indices because we are market neutral. And in my experience, the large, old firms that I am personally familiar with do in fact have beta very close to 0 in their main funds, so on that front at least some firms do deliver.
This doesn't necessarily make the product a good idea even for people who can get an allocation, however. For example, because most (all?) market-neutral firms engage in active trading, a US UHNW person living in a high-tax state will generally have to pay around 50% of each year's gains in taxes. These taxes will have to be paid whether or not they did or were even allowed to withdraw any money from their investments that year, so a gain of let's say 12% becomes 6%, which may have to come out from some other source.
casercaramel144
Anecdotally (can't say how I know), many firms did very well in the 2020-2021 Covid crash, also its quite cheap to say buy 50 million in far OTM puts to guard against black swan events. It's far more likely that a slow slide in SPY will show some Beta correlation than anything else.
barbarr
Ok so in defense of their voronoi graphs, if they used a segmented bar or pie chart instead, you wouldn't be able to see the small quantities clearly, and if they used circles of different sizes, it would be easy to mistake the radii as the measured quantity instead of the area. Similar issue arises with lengths/widths if you use rectangles. Their visualization nudges you to compare areas which is a good feature imo.
airstrike
Just put regular columns next to each other.
fn-mote
> it would be easy to mistake the radii as the measured quantity instead of the area
Humans perceive the area as the measured quantity even when radius is the intended, so this isn’t going to be a problem.
thaumasiotes
> and if they used circles of different sizes, it would be easy to mistake the radii as the measured quantity instead of the area
No, if the measured quantity is represented as the radius, everyone will assume it's the area, and you've designed a very bad graph. If the measured quantity is represented as the area, everyone will assume it's the area, and you're fine. The area is what you can see.
IncreasePosts
Hedge funds aren't necessarily about getting max gains - they can be about decorrelating some of your investments (hence the hedge). So maybe buying SPY would have worked , but people with their money in hedge funds probably already have a bunch of investments correlated with SPY.
Terr_
> they can be about decorrelating some of your investments (hence the hedge).
As a tangential caution to readers: Remember that where you work is something you want to diversify for: Put a bit more into things that won't go bust around the same times you lose your job.
clove
That's no longer true and hasn't been for a long time. While the name comes from that concept, the "hedge fund" is now just any fund marketed to accredited investors.
frenchtoast8
Does this graph format have a name? Google isn’t turning up anything for me.
Terr_
Resembles an unhelpfully simple
roryokane
Yeah, I was about to post that it looked like some hybrid of a voronoi diagram and a treemap. More about those diagram types that can be combined in this manner:
fallingknife
I've seen plenty of attempts at cramming down multidimensional data into less dimensions, but this is the first time I've ever seen the opposite!
neilv
It's nice to see that hedge funds are still around. I thought all the bros had switched to tech.
tombert
I've tried for the last several years to go the other direction: tech -> finance. I've sent thousands of applications to hundreds of trading and finance companies, and gotten zero bites in the last two years.
I am currently just assuming that there aren't as many finance jobs as there are jobs at big tech.
anitil
I have found (in other areas - supply chain, hardware, mech eng, finance) that it's much easier for people to move from <field> in to tech than the other way around. I'm not sure if that's because other fields require proof of capability (like a bachelors) whereas tech seems more welcoming to someone from other backgrounds.
tombert
I think it's partly because "tech", as a career path, is relatively new, so its requirements aren't really as "solidified" as a lot of other fields.
mhh__
There aren't.
edm0nd
You probably gotta have some wild AI and Quant skills on your resume to get any sort of response.
tombert
I was trying to get into the more software-engineering side (e.g. stuff like what Jane Street advertises). I have plenty of experience at BigCo tech companies, but that doesn't appear to be enough.
I'm not bitter about it or anything, I'm not entitled to a yuppie finance job, but thus far no luck with it. There might be some magical configuration of my resume to make it stand out better to these companies, but I haven't found it yet if there is.
affyboi
I don’t think it has to be that crazy. I only have a Bachelors in CS.
RhysU
Find a recruiter.
tombert
Easier said than done! When I've reached out to finance recruiters, even for stuff that I'm more or less qualified for, they pretty much always ignore me. One of them flat out told me that they will only work with people with a bachelors from a "Top 20" school, which I definitely do not.
pkkkzip
You just aren't as special or interesting as you think to them. Think about this, there are many finance focused graduates with several years of experience in that industry (buy-side im presuming from your comment) and being able to code isn't as special as SWE think it is.
This is another case of software devs thinking they can crack finance/trading because they know how to code. The myopia comes from the difference in culture and how risk is treated from tech organizations to finance.
Exception is if you have an advanced math/physics degree that will be useful in the domain of quant shops but I wouldn't recommend someone taking that route just because they want to make money.
There are lot of finance/trading jobs. I wouldn't waste time pursuing that field. Very few end up parachuting with a mid six digit figure salary even inside that industry and these are people with many years of finance specific experience.
tombert
I don't really think I'm terribly special. As I said in sibling comments, I have been trying to break into more of the software side, not the quant stuff. I don't think I need to be special in order to try to break in, as long as I set my expectations to "it's a long shot" mode.
I do think that I could learn any level of quant if I really wanted to, but I would rather focus on the software stuff.
I have about half of a PhD in theoretical computer science, but that's not usually the "math" that's useful in finance, outside of the software side.
moron4hire
I'm just assuming nobody is actually responding to job applications in any industry anymore.
yieldcrv
They are more pedigree focused
But cold applying isn't in vogue anyway
blackeyeblitzar
Aren’t hedge funds also tech companies these days? For example, isn’t the parent company of deep seek a hedge fund?
anotherhue
Surely there isn't a shortage of competition? Does everyone just want in on the big names?
tmpz22
Old people who don't watch their assets, very rich people who don't watch their assets. Maybe we should build a protection mechanism for it - maybe call it the Consumer Finance Protection Bureau?
metadat
For reference, see:
DOGE-Backed Halt at CFPB Comes Amid Musk's Plans for 'X' Digital Wallet - https://news.ycombinator.com/item?id=43003636
And
The biggest microcode attack in our history is underway - https://news.ycombinator.com/item?id=43001730
JumpCrisscross
CFPB is irrelevant for hedge fund LPs.
yieldcrv
and is irrelevant in general since its just been nuked from orbit
null
readthenotes1
Yes and what would be its job? Making sure that rich people have lawyers who read contracts? That would probably suffice. I don't have much sympathy for people who have enough money to use hedge funds and complain about the terms of their completely voluntary transaction.
fallingknife
Most investors who invest in these funds are institutions and the ones who are (extremely rich) individuals are very unlikely to not be paying attention.
wslh
Automated protection tools could also help in monitoring hedge funds, similar to how apps like BillGuard[1] worked for personal finance. Many investors don’t actively track their holdings the way they do with credit cards.
mhh__
The top hedge funds that can realistically promise [0] excellent returns are basically all capacity constrained AFAICT
Either that or they've switched business model to mostly making money on the management fee. It's easier to grow the assets than the returns.
[0] If you can get money into one of the top multi-managers, in peacetime you are basically looking at somewhere between a nice and very good return every year. Where peacetime could well include a big bear market in stocks e.g. Millennium made 35% in 2022 despite a big draw down in the SP500.
This of course isn't magic, illiquidity, big spikes in (say) funding costs, or just foolishness can still kill them.
roncesvalles
>It's easier to grow the assets than the returns.
A certain famous Italian gentleman had the same realization.
JumpCrisscross
> Does everyone just want in on the big names?
Yes. Generating consistent returns is hard. Proving you can do it is harder. Investors may be rationally willing to cede most of the upside in exchange for less exposure to the downside. (Part of the problem is the political pressure on public fund managers to avoid losses.)
JKCalhoun
Yeah, I'm not sure who is being scammed. Myself, I have never heard of any of these — Citadel, etc.
thrill
Hedge funds are entirely voluntary transactions on the part of participants.
yieldcrv
I agree that's a problem to be discerning about - and it may be impossible to be discerning about - I also think people are looking for any reason to just "index" and purchase the S&P 500 or VOO ETFs
like A) from being ineligible to be in hedge funds, and then B) to justify their fear
but hedge fund returns are not able to really be aggregated so simply, there have been attempts, I can pull up whatever article you're probably thinking about, but in real life if you join a hedge fund, you aren't joining a portfolio, your capital is applied to new positions.
so every subscription to a hedge fund has unique performance. only people that joined at the exact same time with the same amount of capital have a chance of having the same experience.
I think that reality muddies most of the discussion about the concept of hedge funds and investor returns.
You should definitely look for the strategy you like, followed by liking the people running the fund.
ddmitriev
This does not sound right. Maybe venture capital funds work this way? (I wouldn't know about them.)
But with regular hedge funds, you are joining a portfolio and you do get the return even on the positions that were in place at the time you invested. The only differences between investors that may affect the return that is allocated to them are a) their share classes, which may affect investment terms such as fees or withdrawal rights, and b) their respective high watermarks, which may affect the payment of performance fees. Everything else within the same fund will be the same.
mjfl
As someone who has worked in the industry: hedge funds are certainly parasites on our society, who make money not from wealthy clients (as is widely thought) but by managing government money through the social security system, union pension funds, college endowments, and sovereign wealth funds. They are a tool to redistribute billions of dollars of ordinary people's money into the pockets of an 'in-group' that then uses the money to buy political influence. I've watched this happen with my own eyes.
SideQuark
Hedge funds don’t magically take your money any more than Santa Claus takes your money.
Pretty much none of your claims are true, unless those actors desire to be in a hedge fund (same as any place to invest). For example, social security is prevented by law from investing in anything except specially crafted Treasury bonds. Sovereign wealth funds are not “ordinary people’s money.” Union pensions are controlled by unions, and if they’re wise, are spread over many options. Same for college endowments.
It’s not hard to look up the sizes of these various asset categories and see your claims are mathematically impossible. I believe arithmetic over your eyes.
Don’t want one, invest elsewhere.
mjfl
I was wrong about the social security system, which I must have gotten confused with some kind of pension system, like CALPERs, which used to invest in hedge funds before pulling out in 2014, but still allocates 40% of its portfolio into private equity [1], which may be worse than hedge funds for reasons I have discussed elsewhere. Everything else I said was true.
> Don’t want one, invest elsewhere.
Ordinary people have little control over what their pension funds invest in, and typically are not informed on these issues.
[1] https://raoglobal.org/insights/calpers-goes-big-on-private-e...
SideQuark
> which may be worse than hedge funds
PE obtains higher returns than public funds simply because they have more options to invest in. They can put the cash into anything public invested funds can choose, AND a massive range of other projects.
CalPERS is not an ignorant investor. They see the results, and they allocate accordingly.
From your own link : "Over the past ten years, private equity has delivered an annualized return of 11.8%, compared to 8.9% for public equities, 2.4% for fixed income, and 7.7% for real assets. With traditional asset classes like bonds struggling to keep pace with inflation, CalPERS is looking to private equity to help them meet their long-term investment goals."
So yes, if you want worse returns, continue to believe unsupportable things. If you want to manage people's money, then choose well, and this is chosen well.
>Ordinary people have little control over what their pension funds invest in, and typically are not informed on these issues.
Which is good, because they also are not generally capable to manage their investments with as good as returns (otherwise every little mom and pop would beat PE, which is extremely far from the truth).
A google scholar search on PE returns versus public, top several hits that give numbers to the question:
https://www.joim.com/wp-content/uploads/emember/downloads/P0... - PE outperforms
https://openurl.ebsco.com/EPDB%3Agcd%3A7%3A13677223/detailv2... "The model illuminates why, over the short term, private returns are superior to public ones, whereas over the long term, public and private returns are largely interchangeable after proper adjustments are made, resolving a long-standing conundrum"
https://onlinelibrary.wiley.com/doi/abs/10.1111/jofi.12154
"We study the performance of nearly 1,400 U.S. buyout and venture capital funds using a new data set from Burgiss. We find better buyout fund performance than previously documented—performance has consistently exceeded that of public markets. Outperformance versus the S&P 500 averages 20% to 27% over a fund's life and more than 3% annually. "
It's best not to invest with emotion, but with knowledge. Knowledge comes from analyzing markets and reading financial industry research, not repeating misinformed tropes.
JumpCrisscross
> managing government money through the social security system
Do you mean the social safety net? Social security does not invest in hedge funds.
barumrho
You are right about Social Security. It only holds Treasuries. But, there are many other pension funds like teachers pension, government workers pensions, etc that manage working class money.
ceejayoz
Well, not yet.
energy123
Why are you singling out hedge funds? The blame lies equally with all active fund management, as well as the investment managers (e.g. pension funds) who decide to allocate to them instead of to a passive tracker.
JumpCrisscross
> blame lies equally with all active fund management, as well as the investment managers (e.g. pension funds) who decide to allocate to them instead of to a passive tracker
Except active management works for any metric other than long-term yield maximisation. (Most institutions have short-term needs, whether for liquidity or optics.)
bormaj
As someone else in the industry, is it fair to categorize all HFs this way?
jldugger
Wait, which part of the social security system is investing in hedge funds?
stackskipton
US Social Security doesn't. Other countries may like Norway: https://en.wikipedia.org/wiki/Government_Pension_Fund_of_Nor...
namuol
Any advice to reform things? As individuals or as a collective?
mjfl
(1) widespread education and awareness of this phenomenon, (2) put in restrictions on large institutions i.e. the government, unions, universities so that they only invest in funds with 'low-fee' structures and hire professional risk management at the institution-level that hedge risks using more standard methods like mixing bonds and equities and cash. Ban large institutions from investing in private equity, which is a high fee structure built to hide losses over long term periods.
JumpCrisscross
I have invested in hedge funds as an individual. Your proposals would be great for me; less competition. I’m sceptical of the public benefits, though there is absolutely a political bloc who will like the optics of banning public investments in HFs and PE.
> private equity, which is a high fee structure built to hide losses over long term periods
Empirically false.
The problem with PE is the same as HFs: fees and dispersion of outcomes.
yieldcrv
I’ve been satisfied with the hedge fund I was in
They didn't just do common stock equity trades, they sliced and diced money flows into and out of companies so interestingly
It felt like I had employed people to find, and create, deal flow
In bear markets theyd find companies that VCs all passed over, and created a pivot for them and extremely favorable capital terms to the hedge fund such as revenue splits before it hits the company’s books
When people say parasites, I see transactions that would never have happened
I see transactions I would never be able to get into the room to negotiate to happens
I also see how nobody knows anything. People see hedge fund movements in equity positions, but they wont see revenue splits, inventory splits for the fund to sell themselves
Its all about what you/your fund specifically does
ldjkfkdsjnv
Yeah places like PIMCO are basically stealing from pension funds through a bunch of complicated financial engineering. Some of the assets they trade arent liquid, theres no consensus on fair price. And so a bunch of funny business goes on
Shouldn't this problem self-regulate, though? Ultimately, investors mainly care about the returns and if you can get better returns elsewhere due to these fees, they will switch.
If they can charge large amount of fees and still stay competitive, then good on them, right?