Fishy Business

[DesertCat]

Assume Jack could transfer gains directly from his fund to Bob's fund. Jack loses 2 cents for each dollar of gains he transfers (his funds management fee). Bob gains 22 cents for each dollar transferred (his 20% performance fee + 2% mgmt fee).

But what is Jack's share of Bob's increased profits? As a limited partner, he'll get his share of the remaining 88 cents of profit. Which means Jack needs to own about 2% of Bob's hedge fund, just to get his 2 cents back. That could be a very hefty investment, depending upon the hedge fund size. But essentially it's a very risky way to make a very small amount of money.

a) Jack is risking his job & jail time.
b) Bob is risking his fund and jail time.
c) This scheme doesn't work for Jack at all if Bob is a lousy investor.
d) It's difficult to transfer gains, buying and selling at the same time doesn't ensure anything.
e) If it works, Jack is reducing his own returns which will lead to a smaller fund and less pay.

Why wouldn't Jack just pull his money out of Bob's fund and put it in his own mutual fund? This way he's not reliant on Bob, doesn't face jail risk, and doesn't have to do anything to hurt his own career, and earns an additional 2% per year on his own mgmt fee.

People do stupid things all the time (like rob banks), so I wouldn't doubt this happens occasionally. But that doesn't make it an effective scheme.