Domestic Fund Formation It is a simple process to enter the hedge fund industry; practically anyone with $15k to $20k can start a hedge fund and forming a hedge fund gets easier every year.
Offshore Fund Formation An offshore hedge fund is simply a structure used by hedge fund managers as a way to attract offshore investors (non-U.S. citizens) or U.S. tax-exempt investors such as pension and endowment funds.
Hedge fund billionaire?
Low fee is not low cost. Jack Bogle likes “cheap” index funds. I don’t know why as they are risky and expensive considering the heavy losses, limited “work” involved and lack of skill. Lose a large percentage of investors’ hard-earned money? It’s the market’s fault not theirs, right? Two 50% drawdowns last decade alone. What intelligent person would invest in such hazardous toxic waste as a passive index fund?

Get someone to make a list of stocks for a benchmark, track them, and then endure years below a high water mark. Which prudent man would invest in such a dangerous product as an index fund? No-one with fiduciary responsibility to themselves, their family or pension fund beneficiaries.

The S&P 500 is just a low quality ACTIVELY managed trading strategy. A hedge fund’s franchise is in trouble if it loses money in even a single year but Bogle’s Folly, the S&P 500 index tracker, gets away with high risk speculation that is unsuitable for any prudent investor’s long term financial goals. Avoid index funds as they cost too much. The fee structure of hedge funds is widely misunderstood. If the net risk-adjusted absolute returns are good the fees are fine.

Hedge fund managers that produce diversifying risk-adjusted returns in ALL market conditions are a bargain. Getting paid a few billion is fair for the value contributed to the wellbeing of retirees savings and pension sponsors in desperate need of RELIABLE absolute returns to pay absolute liabilities. But why do “hedge fund rich lists” treat investment gains on personal capital as income?

There’s nothing new about hedge fund managers “pocketing” a billion. George Soros and Warren Buffett got that in their “paychecks” for several years in the 1990s for making their clients tens of billions. Jesse Livermore “took home” over $100 million in 1929 which is far more than a billion in today’s money. The highest annual “compensation” ever received by a hedge fund manager was by Munehisa Honma. Over $10 billion in some years, even more in 1789.

Incentives work. Hedge fund “salaries” get publicity but overstate what managers earn. Most “pay” is capital gains NOT income. You can’t just take a firm’s AUM and returns, plug in rack rate fees and get a “wage”. Hedge funds employ many highly qualified people who deserve their share plus expensive technology to implement the strategies. Big “salaries” occur when high absolute returns are generated for clients.

Alignment of interests is rare in finance and benefits investors. People who aren’t skilled enough to work at hedge funds join long only firms. The worst of the worst of the investment “management” industry run index funds. Do you want YOUR money managed by a cheap incompetent fool as John Bogle, David Swensen and Eugene Fama advocate? Passive is only for the pathetic. Choose the most expensive managers not the “cheapest” who lose so much.

James Simons, founder of Renaissance Technologies, was “paid” $1.5 billion last year. As with ALL real hedge fund managers he eats his own cooking. He is the largest investor in Medallion Fund which is the world’s best quantitative hedge fund. The fund performed well so he had investment gains. It wasn’t salary. Some “income” came from client fees but that reflects the demand for and skill entailed in generating CONSISTENT absolute returns. Senior management having SUBSTANTIAL personal assets in the fund is alignment with clients.

Financial engineering is no different to mechanical engineering in that you get what you pay for. Performance costs need to be assessed against the quality and engineering of a product. The Trabant and Bugatti Veyron are German cars. You could buy a Trabant for $100 but you can’t buy a Veyron for $1 million. So which car is CHEAPER? Which has the better performance? The Bugatti Veyron is the BARGAIN if you consider the VALUE of the product. Which would you invest in? The Trabant index fund or the Veyron hedge fund? 2 and 20 for alpha is a great deal compared to 0.10 for beta.

Good hedge funds are cheap and index funds are a rip-off considering what investors receive. Medallion Fund returned 29.5% NET of 5% and 44% fees. The “highly respected” S&P 500 index fund made a derisory 4.77% this year, had a 50% drawdown again a while back, has STILL not made up for the litany of losses and yet charges an egregious 18bp – for what? Long term investors would have done better keeping their money in a bank than gambling their savings away on speculative “passive” funds.

An index fund “manager” on minimum wage is overpaid whereas Jim Simons, relative to his value, is undercompensated. Worrying about hedge fund manager “pay” is like refusing to use Google because Sergey Brin and Larry Page “trousered” over $5 billion each last year. If you don’t like that “salary” then don’t Google? If you don’t want 80% of the profits a talented hedge fund manager makes for you then don’t invest alongside them. There are plenty of “cheap” relative return and index funds out there to lose your savings in.

Are good hedge fund managers really paid so highly considering how well their clients do? That money is NOT salary. The hedge fund industry seems to be the only business that considers people successfully investing their OWN money as paid compensation. Those pay figures are not a wage. They are simply a measure of the increase in equity in their own hedge funds.
by Veryan Allen. Copyright

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