This is nothing like regular math. It isn't even like its closest competitor: private equity. They only get to take performance fees on exits, which can take years or even decades (or never) to materialize.
> It isn't even like its closest competitor: private equity. They only get to take performance fees on exits, which can take years or even decades (or never) to materialize.
I would argue that private equity is much worse on fees than hedge funds. Among other offenses, they're able to charge fees to both portfolio companies and investors. The investors usually get a credit for the fees paid by portfolio companies, but it's not a 100% offset.
To an outside observer, this seems to buy you performance that isn't too different from exposure to infrequently marked leveraged standard risk premia.
Private Equity has its own little scams, no doubt. But that doesn't excuse the hedge fund business's "top tick" performance fee scam. Basically, a person like Ackman and some friends could (in theory) bid up a stock 1000%, mark it there at the end of the month or year (or whenever they account for the performance fee), take their performance fee on that mark, and let it crash. In fact, doesn't that sound a lot like Valiant? 30% of the company was owned by Ackman and people close to him.
> Basically, a person like Ackman and some friends could (in theory) bid up a stock 1000%, mark it there at the end of the month or year (or whenever they account for the performance fee), take their performance fee on that mark, and let it crash. In fact, doesn't that sound a lot like Valiant?
How much do you think Ackman lost in personal money on Valeant? You don't think it's much more than the performance fees that he earned from it?
Venture Capital charges huge fees. The Kauffman Foundation had a study in 2012 [1] of their VC investments over the previous 20 years, and concluded:
* 78% of funds did not return enough to justify investment, given the risks and long lock-up.
* The average VC fund fails to return investor capital after fees.
PE as a whole hasn't done much better [2].
It's a dismal industry – for investors, that is, not necessarily for the employees.
Hedge funds and PE firms aren't typically direct competitors. The goals and risk profiles of the funds don't typically align (and hedge funds aren't monolithic as a group, either), but beyond that, there are typically regulations governing which entities can invest in which type of funds. The LPs in big PE funds tend to be large institutional investors--pensions, endowments, and the like. Hedge funds tend to have mostly high-net-worth clients.
> The LPs in big PE funds tend to be large institutional investors--pensions, endowments, and the like. Hedge funds tend to have mostly high-net-worth clients.
The LPs in big hedge funds also tend to be institutional investors.
Isn't the buying and selling of a stock in a hedge fund analogous to an exit? They happen more frequently that deploying capital, but the only big difference is that in a hedge fund you're expected to reinvest that money. So the math is exactly the same as in a PE fund. If a trade or portfolio company tanks, you won't make your performance fee on it.
PE companies also can charge fixed management fees.
