The response to last week’s posting mostly from members of the traditional asset management managers was fabulously interesting to me. I received a number of emails with comments suggesting that I was crazy; others thought I was insane, or thought I was ridiculous (most of them probably worked at the big mutual fund complexes in PA and MA).
I am happy to tell you that I have never met a hedge fund investor who complained about the fees when the investment made money. The only time fees became an issue in my experience is when the managers do not perform. That is the whole concept.
Hedge Funds are truly asset-management organizations— whereas Mutual Funds are asset gathering companies. Hedge Funds are about making money in markets regardless of market conditions. The market goes up, hedge funds make money. The market goes down, hedge funds make money. The market goes sideways, hedge funds make money. That is their job. That is the task which investors have asked these people to perform—and when achieved, they are willing to reward success. That is the difference between hedge fund managers and mutual fund managers or traditional long-only managers who are only able to make money when the market goes up.
The idea that investors should put money into portfolios in which managers can only make money when the market goes up is insane to me. It is like saying you are going to drive a stick shift with one hand and one foot – an impossible feat. Hedge Funds make sense and are used by sophisticated and unsophisticated investors around the world because their managers use all the weapons in their arsenal to make money regardless of market conditions.
Whenever I give a speech about Hedge Funds I always use the same illustration. I take a pen and I throw it up in the air. I ask if everyone believes that no matter how many times I throw this pen up in the air that the pen will go down. Usually everyone says yes. Occasionally there is one joker who says well if you are on the moon the gravity’s pull would not be there and therefore the pen would float. (Those of you, who know me, can imagine what I say to this guy!)
The reality is that markets do not always rise. It is the job of the investor to make sure that when the markets go up they can make money and when the markets can go down they can still make money. That is what Hedge Fund managers are supposed to do for their investors. The problem with investing in long-only products is that they CAN ONLY make money in rising markets. It is fascinating to me that last week’s post – sent out to approximately 30,000 people- made so many people come back to me with comments about oh, but Hedge Fund fees are high and blah, blah, blah.
You know what I have said before; I will say it again and again until I learn otherwise. If managers perform, they are entitled to the performance fee. Right now the market accepts the 1% and 20% fee structure. When the market decides this not acceptable, it will change the fees. The marketplace and competition, my friends, dictate the way things work, period and end of story.
