Really Rich Guys - Top 10 Traders

[ConstantineX]

I just read that Goldman and other top bulge-bracket firms average bonii were in the 150k range this year to stop poaching from hedge funds.

[Duke]

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I just read that Goldman and other top bulge-bracket firms average bonii were in the 150k range this year to stop poaching from hedge funds.

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$150k sounds a lot more like an incentive to an Analyst or first year Associate than someone who might be worth something.

[The DaveR]

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I just read that Goldman and other top bulge-bracket firms average bonii were in the 150k range this year to stop poaching from hedge funds.

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Bad source.

[DesertCat]

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i don't think anyone has bothered to provide substantive evidence that we aren't collectively falling prey to the survivorship bias by lionizing Buffett & his peers. it's just not an easy thing to look at.

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Buffett's beat the market something like 47 out of 50 years (actually more than that, but I'm eliminating overlapping years between Berkshire and the Buffett partnerships) with only one down year. If you ascribe that to coin flipping, i.e. a 50% chance of beating the market in any one year, going 47/50 is an extremely unlikely event.

But it gets even more unlikely when you examine his real results. The Buffett partnerships produced close to an annualized 30% return after fees (close to triple the markets return). Berkshire Hathaway has averaged over a 20% return (double the market return). In reality, the odds of producing double or triple the market's return in a single year is not 50%, it's probably near 20% for double and 10% for triple. What are the odds of beating the market by 2.5x a year over 50 years plus solely by luck? It's called infinitesimal.

The most rabid efficient market theorists gave up that argument decades ago. Probably right after Buffett gave this speech at Columbia in 1984. In it, Buffett pointed out that not only was he beating the market at statistically improbable rate, but so were a group of disparate investors trained in Ben Graham's philosophy but operating different funds and buying different stocks. I.e. if Buffett is just an infinitely rare black swan, why is there a whole group of black swans that grew up with him?

Let me also point out that Buffett's record includes the drag from the huge anchor Berkshire's enormous size has given him the last couple of decades. I.e. the portion of the market he can invest in has shrunk substantially, and he's now down to the most efficient, heavily researched portion of the market, big caps. And still he's outperforming, just not by as much.

When you talk about the top hedge fund guys, it's far, far less than a 10% likelihood they can do 50% in a single year by luck. Even if that could happen 10% of the time, do it for 10 years and you have a 10M to 1 event. There are at least two funds (Renaissance, SAC) that have been doing 50% a year (before fees) for well over 10 years, so their real odds are trillions to one. And there is only about 10,000 hedge funds. One might be a black swan, a freak outlier. But two? No chance.

[NajdorfDefense]

Simons has been doing it for 20 years. SAC is closing in on 15.

One of our funds has been doing 29% CAGR [with less vol than the SPX] for 15+ years. The odds of beating the market by that much, every year, after trading costs, witth a net of less than 100% [70-80%] long exposure, in large size, are several trillions [or more] to one.

If you don't see this simple fact, you don't understand statistics or randomly distributed outcomes. Taleb did not say everyone who beats the market is lucky.

[NajdorfDefense]

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Not the point. I'd like to make a mangement fee and performance incentives by investing in other funds.

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Fund-of-funds is the term of art. They do layer their fees on top.

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I know this, but I didn't know it was common to have hedge funds do this.

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Well, not uncommon.

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The standard hedge fund comp structure--specifically perfomance comp--makes this seem like a terrible deal for investors.

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Some charge fees and a carry, some only fees, and some only carry. We don't invest in FoF that charge fees and a carry. We are only in a few that don't charge a carry.

I have no problem paying an extra 30-100bps to get into the right Funds thru a FoF structure, that are closed or otherwise impossible to get in -- generally they are closed or I'd go direct for my investors.

Also, believe it or not, it can be cheaper to go indirect: Fund abc may have hiked his fees to 'new' investors to 2 and 25, or higher. If I can get in by paying 75 bps, and am now paying the original 1+20 thru FoF +75bps, I'm better off.

Our 2 longest FoF holdings are up 13.8% over 15 years and 17.2% over 14 years, net of course.

Before blowup, Amaranth had been doing 25% CAGR since inception as a multi-strat fund. Once it started having double-digit monthly returns, it was clear they were no longer 'multi-strategy.' [Another possible reason to own HF thru a FoF structure is to minimize this very blowup risk, rare as it may be for larger funds.]

However, I agree, paying 2 layers of fees and carry is virtually always a bad idea. OTOH, people do things for reasons other than CAGR.

[NajdorfDefense]

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Does broader access to more sophisticated and configurable algos .. harder for hedge fund guys to separate themselves from the pack in terms of consistently outperforming returns?
Is stuff like that pushing them to make higher and higher variance plays?

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No, if anything, quite the opposite. Many larger funds are going for low-vol, 'stall-ball' methods of managing money. [Which is a different problem.]

There is a misperception [here, in the press] that already wealthy clients only want to own the highest returning HF each year. That's like saying 2p2ers who invest only want to own the riskiest stocks that may perform the best -- pink sheets, Dubai/Shenzen/Turkey/SA exchange, etc. Not the case.

Besides, nobody is a consistent HR hitter year-in and year-out. Maybe Simons and SAC. I'll take the All-Star singles and doubles hitters every day. Mandel and a few others are getting close to that top echelon as well.

[NajdorfDefense]

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Finance guys,

Does broader access to more sophisticated and configurable algos as well as the ability to get real-time feedback on their performance make it harder for hedge fund guys to separate themselves from the pack in terms of consistently outperforming returns? Is stuff like that pushing them to make higher and higher variance plays?

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Don't hedge funds now days essentially copy index funds and make slight changes to add +5% on their return, thus turning them into hyper index funds?

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I'm in 2 funds where they only own 5-10 stocks. One of them, a famous practicioner, is long about 6 stocks right now.

I don't know a single hedge fund that is remotely structured as you suggest, after having seen a few hundred. Obviously, a fund that is long/short will never look like a long-only fund whether it is 40% net long or 70%. I think you are very confused and meant to say 'mutual fund.'

[Aloysius]

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Some charge fees and a carry, some only fees, and some only carry. We don't invest in FoF that charge fees and a carry. We are only in a few that don't charge a carry.

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Naj - I'm surprised some FoF charge a carry... isn't the whole point that they have relationships / access to the best hedge funds in the world? I'm not too familiar with this world tho. I guess if the LP doesn't mind getting charged carry by primary fund as well as FoF...

I don't believe any VC-focused PE FoF (like Harbourvest) charge anything but a management fee.

-Al

[snowbank]

How much does it take to invest with a trader? Is it available to the public? You don't hear of many people doing this. I don't know a lot about this, could someone elaborate. Do you have to be an accredited investor to invest with them or something?