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AndyM


Total Posts: 2316
Joined: Mar 2004
 
Posted: 2016-05-20 22:40
For asset allocators, it's better to fail conventionally than succeed unconventionally. Their payoff profile for backing mavericks is pretty lousy.

I used to be disgusted; now I try to be amused...

TSWP


Total Posts: 367
Joined: May 2012
 
Posted: 2016-05-21 16:17
Thanks to everyone for all your precious input, I am chewing onto the material, will be back with some adjustments.

Feel free to add more comments and suggestions in the meanwhile.

EDIT: while reading the .pdf from Northern Trust, I have noticed a few things:

1) the need to change fee structures is REAL and it's already happening, so I am not a moron for bringing this up, as some of the commenters in this thread implied, with their reference to a "status quo" that is in fact not anymore here

2) the problem is to understand what the industry is willing to accept, based on what already is been done by other managers, but I do not see why a new, sound proposal could not be valid as the other ones already spelled in the Northern Trust paper, in the end innovation is key, so again I feel reinforced in the idea that all this thread makes a lot of sense if its aim is to find a new, better fee structure that may help with capital raising

3) incentives for reduced decline vs. benchmarks - it is the first time I read this in a paper, but I have produced this kind of effect for some clients I have advised and so I am going to also consider this, because if I can limit your losses maybe you (the investor) should pay me for that, we'll talk about this later.

I'll keep reading and thinking, I will come back...

The only thing that counts: can you make money?

radikal


Total Posts: 253
Joined: Dec 2012
 
Posted: 2016-05-21 17:10
@TSWP

In the broadest strokes, I view the type of trading/thinking I do is seeking synthetic optionality or conditional optionality, and where possible putting it on cheaply to finance in other ways.

"My model says that based on the movements of A+B, C has a shifted forward distribution such that if it rallies, it could rally HARD. I can't sell calls on C, but I can sell them on D, which is similar to C. When I put on my wizard hat and robe and look into the crystal ball of my model, it says this is a good idea."

It's kind of hard for me to view the world like this and yet tie myself to just the performance of one of those assets, or even the basket of those assets. To fully linearize, I'd have to strip out and hedge the tail optionality, but for a lot of reasons, that's not really desirable.

As an investor in the above, I feel better served by asking:

"How good are you at modeling the AB-C relationship? What does it represent? When does it fail? When does C-D relationship not hold?" etc etc

There are no surprising facts, only models that are surprised by facts

goldorak


Total Posts: 986
Joined: Nov 2004
 
Posted: 2016-05-21 18:29
Just two more things. First of all, if people at NT were what I would call competent, they would be working somewhere else. This is probably one of the worst counter-parties I had to work with. Second, if I were you I would not worry too much about fees, but about the real world out there where the one single question is: "How much of a f.... kickback am I getting for investing my client in your Fund ?". And believe me, most allocators (funny thing to see my spellchecker proposing "alligators" here) do not care about a share of your performance fee as they anyway have NO illusion on what your performance will be. A sad and dirty world it is out there.

If you are not living on the edge you are taking up too much space.

Tradenator


Total Posts: 1582
Joined: Sep 2006
 
Posted: 2016-05-21 19:23
Extending goldorak's thoughts, I suggest you should stop trying to get it perfect and instead try to get it to market. You seem to be succumbing to the dreaded analysis paralysis.

TSWP


Total Posts: 367
Joined: May 2012
 
Posted: 2016-05-23 09:35
radikal: many thanks for the clarification.

goldorak: ha ha re alligators, but what do you mean when you say
"if people at NT were what I would call competent"
what is NT?


Tradenator: sure, I agree, but we have time before we go to market and I am basically an analyst, so I like to dig deep into things and check them from all angles before I think a solution and make a final decision.

I appreciate all your help guys, thank you.

The only thing that counts: can you make money?

goldorak


Total Posts: 986
Joined: Nov 2004
 
Posted: 2016-05-23 10:24
NT = Northern Trust. The power of habit. Sorry about that.

If you are not living on the edge you are taking up too much space.

pj


Total Posts: 3327
Joined: Jun 2004
 
Posted: 2016-05-23 13:53
> NT = Northern Trust
Not Nassim Taleb?

I saw a dead fish on the pavement and thought 'what did you expect? There's no water 'round here stupid, shoulda stayed where it was wet.'

TSWP


Total Posts: 367
Joined: May 2012
 
Posted: 2016-05-23 21:06
Nassim Taleb= incompetent: that would have been too obvious Big Smile

The only thing that counts: can you make money?

TSWP


Total Posts: 367
Joined: May 2012
 
Posted: 2016-05-24 10:02
As promised, I am going to make a few more comments on the NT paper, which I have found quite relevant and helpful to expand this thread's discussion.

1) the use of hurdle rates tied to the benchmark is becoming more and more common, so I wasn't completely off the track with that proposal, although I thank again radikal for explaining why it may be pointless or even a problem doing so (in some cases)

2) underperformance hurdles are very interesting and should be widely adopted, in the end a manager is good also if he/she limits or reduces (greatly) the drawdown in certain market conditions where the market as a whole is in a state of heavy negative returns (Bear Markets, crashes, financial crisis years, etc.)

3) the idea of clawbacks of incentive fees paid in previous years is as well interesting, and somehow cements what we said, that short-term crystallizations are only good for managers (and a ripoff for the clients).
However where I disagree is the part where it says that the following years' performance fees, if performance is lagging, should be reduced in the name of the previous years' higher fees, that is RIDICOULOUS, it's like to say that if I have bought a car from your shop 3 years ago and it goes well and now I buy a new one and it has some problems, you have to give me back part of the money I gave you 3 years ago for the other car - what manager would accept these terms? I won't.

4) more transparency for higher fees, not sure what "more transparency" means in this case... magic words... and nobody knows what they means...

5) reduced fees for longer lock up periods: this was discussed in this thread and again some people poured scorn on the idea, but it seems they were not up-to-date with the latest trends...

Overall it seems to me there is plenty of space for innovation in hedge funds fees, although I personally may have not hit the sweet point (yet).

The only thing that counts: can you make money?

TSWP


Total Posts: 367
Joined: May 2012
 
Posted: 2016-06-17 10:57
There has been an acceleration in the fund launching, during the US summer we will meet our first investor and we may have soon to present our fee structure.

I have been thinking a bit of a variation on the previously proposed "50% fee on returns above the benchmark":

let's say that instead we will charge a increasingly higher fee on our alpha, but only when our alpha is above the hurdle rate of return comparable to a high quality (joke) sovereign bond.

So let's say there is a high quality (joke) sovereign bond out there, that returns 1% a year, and let's say the benchmark returns 5% for the year, we only start to charge a incentive fee once our return is:
> (1%+5%=6%)

Our fees are then calculated on the alpha portion of the returns, but they increase as our risk-adjusted returns increase.

In other words: if we make a +1% return above the hurdle rate explained above, we charge you maybe a 15% fee on that 1%, but if we do a 40% return above the hurdle rate we charge you maybe a 50% fee on that 40% (or anyway we charge you a large fee, larger than 20%).

What would you gentlemen think of such a scheme?

Thanks.

The only thing that counts: can you make money?

rowdyroddypiper
NP Wrestling Champion

Total Posts: 1178
Joined: Apr 2004
 
Posted: 2016-06-17 16:22
Do you want to raise money or do you want to flog a new fees structure? Without knowing your investor targets (pension, endowment, fo, hnw) it's not easy to accurately say how you'll be received. For something like a pension / swf they're just going to tune out during this part and probably move on. They already have fees structures they prefer anyway so if you're a de novo fund you'll probably have to start from there. If your goal is to promote alignment of interests with investors comp timing (vs. quantum) and manager investment in the vehicle is really much more persuasive.

Here is a doc that has some insight into how pension / swf view alignment. Enjoy!

Revolution to the mean

mental


Total Posts: 5
Joined: Jun 2011
 
Posted: 2016-06-17 19:54
@TSWP

Like many retail traders are told, K.I.S.S. Most asset allocators are dumb. Even with whatever fancy due dili they claim to be performing. Complex fee structures won't be appreciated. Stick to a headline 1.5-2/20 and entice seed investors with a founders class, 1/10-15 or whatever "discount" gets them to bite. Annual crystallization is fine. Sure, big names rolling out of big shops might squeeze for semi-annual or quarterly and still get money.

If the quality of your product and your salesmanship cannot achieve this, a 5-page fee structure certainly isn't going to save you.

TSWP


Total Posts: 367
Joined: May 2012
 
Posted: 2016-09-29 09:46
Brevan Howard has just removed completely its management fee, so now they only charge incentive fees: it's a 0/20 fee structure now.

Where are the forumites who said "the status quo is here to stay and won't be changed"?

I was quite right in pointing out that the current fee structure makes no sense and has to be changed, but some people are probably not very up to date with the latest developments in the industry...

Anyway, we are launching the fund in early 2017, in USA, I will let you know what we decide to do with the fees. In the future I plan to organize conventions with investors and funds to create consensus about new fee structures, to change the industry standard. I bet we'll find a lot of support from investors and some dead threats from fund managers.

The only thing that counts: can you make money?

Patrik
Founding Member

Total Posts: 1336
Joined: Mar 2004
 
Posted: 2016-09-29 10:07
My impression of the thread was more that if you're new and unknown, then getting any airtime with investors at all is not so easy. To then expect investors to listen and try to understand a very different and potentially complicated fee structure - that's optimistic. Not that fee structures will never change.

Someone like BH obviously has an easier time to get the airtime and focus from investors. Not that I'm saying that's what is happening here - that's just doing what's necessary after a period of difficulties I gather. And obviously having no fixed income to pay the bills is easier when you have a few bn in your back pocket..

Capital Structure Demolition LLC Radiation

TSWP


Total Posts: 367
Joined: May 2012
 
Posted: 2016-09-29 10:30
Patrik, I certainly agree with you that a fee structure must be easy to understand and that being a large fund makes it easier to cut fixed fees.

Still the fixed fee has been a pillar of the industry and consequently asset hoarding the preferred direction to reap safe gains for managers, taking less risk in the alpha/outperformance section of the business.

The fact that a giant like BH accepts to change the status quo, to me is a big slap in the face to those that were thinking this is not going to change, while my point was that this HAS TO CHANGE, because it's unfair and inefficient, regardless a fund size.

The only thing that counts: can you make money?

goldorak


Total Posts: 986
Joined: Nov 2004
 
Posted: 2016-09-29 11:33
> I was quite right in pointing out that the current fee structure makes no sense and has to be changed, but some people are probably not very up to date with the latest developments in the industry...

Could you elaborate the logical link between an old glory, piling up on fees based on reputation and champion marketing, waiving its management fee and you being right?


If you are not living on the edge you are taking up too much space.

TSWP


Total Posts: 367
Joined: May 2012
 
Posted: 2016-09-29 11:42
Sure, I will write a paper about it and send it to you for peer review.




The only thing that counts: can you make money?

HitmanH


Total Posts: 427
Joined: Apr 2005
 
Posted: 2016-09-29 11:53
I love the press BH have here. They've spun it so well.

Management fees have only been removed if you'v been invested over a certain period of time (5 years?) - so by no means all, or even the majority of their investors. And on 2 of the approx 6 products they run.

However - this isn't to meant that there isn't news in different fee structures. I've heard a rumor that in London, a new fund (quant, infra & data heavy) is going with no management fees - but a pass through of costs (not sure how that will go with investors - I know some will have problems) - so very transparent not to make money on management (and arguably no incentive to be efficient...) - and just make money on perf...

There's legs in this - and if you've a cornerstone investor who shares your way of thinking - cool - else the 'safer' (not correct) option is a more standard (but add a hurdle!)

TSWP


Total Posts: 367
Joined: May 2012
 
Posted: 2016-09-29 12:02
>a pass through of costs

That is a very interesting approach, thanks for sharing the info.

It's worth studying what costs could be transparently shared with the investors, rather than a generic 2% annual management fee with no explanations.

The only thing that counts: can you make money?

goldorak


Total Posts: 986
Joined: Nov 2004
 
Posted: 2016-09-29 13:06
> Sure, I will write a paper about it and send it to you for peer review.

Plenty of academics specialized in logic would love this new methodology. I never do peer review. I do not work for free.




If you are not living on the edge you are taking up too much space.

Patrik
Founding Member

Total Posts: 1336
Joined: Mar 2004
 
Posted: 2016-09-29 16:33
Millennium has pretty much always (what I know) been running a similar fee model - pay fixed costs and pay the PMs as cost to investor, no fixed fee, take a cut of what's left after that.

Capital Structure Demolition LLC Radiation

Martinghoul


Total Posts: 856
Joined: Oct 2008
 
Posted: 2016-09-29 18:28
There are also others, apart from Millennium, actually...

Insofar as I may be heard by anything, which may or may not care what I say, I ask, if it matters, that you be forgiven for anything you may have done or failed to do which requires forgiveness...

HitmanH


Total Posts: 427
Joined: Apr 2005
 
Posted: 2016-09-29 18:36
Citadel (some funds), QSAM

mental


Total Posts: 5
Joined: Jun 2011
 
Posted: 2016-09-30 00:06
I wouldn't call M and C's fee structure transparent by any means. It's rather convoluted, and any amount of digging shows that they'd be much cheaper at 2/20. But the market will bear what the market will bear and they know it.
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