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guy_incognito


Total Posts: 23
Joined: Apr 2016
 
Posted: 2019-02-04 18:23
Read a piece here about pressure from 2/20 to 0/30 fee structures. anyone experiencing this? is this coming from smaller investors or big institutionals? in my experience investors don't care about fees as long as returns are good. also it seems to me that (as the article says) investors are hesitant to go for 0/X fees as it is an operational risk to the manager to not have consistent capital to pay to keep the lights on. It also seems to reward greater risk taking to capture the X% of profits... maybe not good risk taking.

thoughts?

HitmanH


Total Posts: 478
Joined: Apr 2005
 
Posted: 2019-02-05 00:11
When it started 18m ago - it was Albourne as consultants leading it, and Texas Teachers were the client doing all the roadshows with them

ronin


Total Posts: 454
Joined: May 2006
 
Posted: 2019-02-05 12:48
Zero and thirty isn't exactly new. It must be over ten years since people who think they are investors started offering it to people who think they are managers. When they found each other, each party got exactly what it deserved.

Having said that, if you are newly desperate because every one of your products had double digit losses last year, I suppose it beats cutting cheese for Tesco. Even if it is just a temporary stay of execution - a lot can happen in a year. Not that it will, but it can.

In all seriousness, I agree that it would encourage high risk taking and zero effort to retain investors. But hey - maybe that's exacly what Texas Teachers had in mind.

"There is a SIX am?" -- Arthur

HitmanH


Total Posts: 478
Joined: Apr 2005
 
Posted: 2019-02-05 14:22
Sorry, I typed way too quickly without reading.
I was referring to the Albourne / Texas Teachers 1 OR 30
Attached File: The-Texas-Teachers’-“1-or-30”-fee-structure.pdf

The 0/30 - as ronin says - has been around for ages. It is particularly is common for investors (like the Aussie Supers) who have to report paid to sub-advisors; and also on the manager class - it seems to be common in CTA & Macro (esp systematic, but also discretionary) spaces - which I had thought to be because they scaled well - to manage another $ of assets has less marginal costs (you have less capacity issues), but I can't be sure of that

ronin


Total Posts: 454
Joined: May 2006
 
Posted: 2019-02-05 20:32
> Albourne / Texas Teachers 1 OR 30

Got it. Haven't seen this before.

I appreciate the sentiment. But shame that nobody ever told them what "alpha" means. By their definition, SPX*2 is full of alpha. SPX*3 even more so. Hell, I've got an infinite factory of alphas, just for them.


"There is a SIX am?" -- Arthur

guy_incognito


Total Posts: 23
Joined: Apr 2016
 
Posted: 2019-02-06 18:22
This article was really interesting. It seems to swap out one hard problem (aligning investor/manager incentives) for another (picking an index to benchmark the strategy to "beta expected NAV"). What if my strategy's goal is modest returns but superior variance/drawdowns/correlation? not sure there are indices to reflect that. Do you just compare your strategy to some aggregate of similar strategies?

I think they would have a pretty good idea here if they scrapped this beta adjusted alpha altogether.

HitmanH


Total Posts: 478
Joined: Apr 2005
 
Posted: 2019-02-11 04:55
RE: Ditching the beta-adjusted alpha - actually this is how a lot of investors have implemented this (at least the 2-3 that we as a firm know but then again we're a strict market neutral firm, so maybe just hasn't come up).

I think it's super applicable to add this for fundamental equity l-s managers, who have such a ridiculous beta (CS AllHedge Index has something like >85% correlation to SPX), but not (most) quant or other managers

HitmanH


Total Posts: 478
Joined: Apr 2005
 
Posted: 2019-02-11 04:55

ronin


Total Posts: 454
Joined: May 2006
 
Posted: 2019-02-11 11:10

I guess the fairest way to do it would be to publish the list of betas that they are not paying for, project any alpha on those betas, subtract the projections, and pay for what ever remains.

But I am personally not a great fan of this endless quest for orthogonality. After you have seen enough pairs of strategies with 90% correlation but one is Sharpe 2 and the other is Sharpe -2, you start to look at things a bit differently.

"There is a SIX am?" -- Arthur

TSWP


Total Posts: 414
Joined: May 2012
 
Posted: 2019-02-26 01:29
After taking some time to study the Albourne's document and also reviewing some of the issues that I brought up here, I think I was not too far from the truth when I criticized existing fee structures.

But to me the "1 or 30" proposed by Albourne Partners does not work, and the idea that you could theoretically get paid for alpha even when you are generative negative returns (but better than the benchmark) is beyond ridiculous (I know some investors are willing to do it, but it does not make any sense).

Maybe the good part is that 30% of alpha seems to be acceptable to investors, that part can be cannibalized/taken away as know-how, what investors are willing to accept.

Adding some sort of projected beta hurdle is also an idea that was discussed before, don't disagree with it, may be good for the industry if adopted widely, clear the weeds, good to know some Pension Funds raised their voice and said they wanted it that way.

Rewriting the rules for the management fee remains key to me.

Do those guys in Stamford really need 3 billions a year in fees to cover their running costs?

Maybe paying only the yearly costs would be a better way to deal with that fixed fee: set it to x dollars a year to keep the boat afloat but pays nothing more than that, then the incentive fee is only paid for positive performance above a certain benchmark/hurdle.

No more Hamptonsvillas and Ferraris, I know, sucks...


ronin


Total Posts: 454
Joined: May 2006
 
Posted: 2019-02-26 12:14
> Maybe paying only the yearly costs would be a better way to deal with that fixed fee: set it to x dollars a year to keep the boat afloat but pays nothing more than that, then the incentive fee is only paid for positive performance above a certain benchmark/hurdle.


That's what Schonfeld does. But I am not a great fan.

As a manager, it rewards you for inflating the costs. Forget about trimming the fat - this is all-you-can-eat and happy hour rolled into one.

It's good to have the conversation, and presumably a decent fee structure will crystallize in the end, but it isn't yet clear (to me at least) what it will be.

"There is a SIX am?" -- Arthur
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