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90% Of Hedge Fund Managers Are Overpaid Relative To "True Talent"

Tyler Durden's picture




 

With plunging dispersion (across stocks returns) and soaring beta to the market, it appears an increasing number of hedge fund investors believe the masters of the universe aren't worth the money. As Bloomberg reports, nine out of 10 hedge-fund managers are overpaid as management fees don't reflect declining interest rates and fund returns, according to Unigestion Holding SA, which invests $2 billion in hedge funds. With The Fed at their back, it is hardly surprising that one fund of funds manager blasts, "the philosophy of the hedge-fund industry, as it should be, is to remunerate true talent; fund managers should be remunerated when they perform. They should not be remunerated for doing nothing."

It's not surprising; since, if alpha is all but impossible...

 

Then funds will take beta instead...

Funds have not been this balls deep long beta in stocks since the top in 2007

*  *  *

As Bloomberg reports,

The fees, which still make up as much as 2 percent of a fund’s assets, represent a disproportionately high share of the total remuneration unrelated to performance, said Nicolas Rousselet, head of hedge funds at Unigestion. To align managers’ pay more with performance, the fund industry should either abandon the management fee or combine it with a hurdle rate that one must achieve before collecting incentive fees, he said.

 

“The philosophy of the hedge-fund industry, as it should be, is to remunerate true talent,” Rousselet said in a telephone interview on Sept. 9. “Fund managers should be remunerated when they perform. They should not be remunerated for doing nothing.”

 

Fees are coming down amid efforts to win mandates in an industry that traditionally charges about 20 percent on performance and 2 percent on the total assets. Investors paid an average 1.69 percent last year, with the share of those who paid 1.5 percent or more at 79 percent, almost unchanged from 2012, according to a Deutsche Bank AG survey published in February.

 

...

 

“Hedge-fund managers should work harder to justify the fees that they earn.”

 

...

 

Fee negotiations “continue to become a more accepted practice for investors and managers globally,” according to the Deutsche Bank survey. Seventy-four percent of respondents said they negotiate fees, up from 51 percent two years earlier.

 

“We are negotiating with hedge-fund managers,” Rousselet said, adding that he doesn’t see management fees trending down. “But if you buy a top manager, the bargaining power is not in your hands.”

*  *  *

But, there is no skill anymore as markets are entirely disconnected from fundamentals...

 

*  *  *

Maybe after September, they will have to work harder?

 

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Thu, 09/11/2014 - 15:55 | 5207982 Itchy and Scratchy
Itchy and Scratchy's picture

Too bad they ain't too big to fail!

Thu, 09/11/2014 - 15:57 | 5207991 yogibear
yogibear's picture

Jack Lew and Janet Yellen have them covered.

Thu, 09/11/2014 - 16:50 | 5208240 Vampyroteuthis ...
Vampyroteuthis infernalis's picture

Hedge funds are setup so the children of the rich can remain so without significant effort. If you expect them to perform, well, they would no longer be rich. See professor, lawyer, media consultant and etc.

Thu, 09/11/2014 - 15:58 | 5208005 Dr Strangemember
Dr Strangemember's picture

They need to be paid based purely on performance, not AUM!  What a crock of BS.

Thu, 09/11/2014 - 16:20 | 5208110 babylon15
babylon15's picture

This won't work either.  This incentivizes them to have higher exposure to beta and to gamble.  If they win, they get 20% of the winnings.  If they lose, well, it's your problem.

 

There is no good way to pay other people to manage your money.  Best to take matters into your own hands.

Thu, 09/11/2014 - 16:06 | 5208046 Renewable Life
Renewable Life's picture

With the writing that is on the wall right now, ill be surprised to see the EU make it until 1/1/15 as it is structured today!!

Thu, 09/11/2014 - 15:55 | 5207983 Kirk2NCC1701
Kirk2NCC1701's picture

Newsflash:  ALL Executives are overpaid relative to their true talent

Thu, 09/11/2014 - 16:05 | 5208038 Muddy1
Muddy1's picture

Like our "JV" President.

Thu, 09/11/2014 - 15:56 | 5207987 yogibear
yogibear's picture

Brilliant observation (sarc). Getting millions in yearly bonuses.

Thu, 09/11/2014 - 15:58 | 5208002 huggy_in_london
huggy_in_london's picture

Well, lets be clear.  Many hedge fund managers DO NOT get paid.  Its the hedge fund OWNER or principal is the one that gets and keeps the 2% fee.  The average punter, even when he makes money, gets nickle and dimed by the owner then also.  

Thu, 09/11/2014 - 16:16 | 5208094 huggy_in_london
huggy_in_london's picture

why the red arrow?  its the fuking truth dude.  go work in one or two of them, you'll soon find out who gets properly rich from it.....

Thu, 09/11/2014 - 16:24 | 5208126 disabledvet
disabledvet's picture

That was from management. "We'll make it up in the churn!" It is interesting ing just how low volume is. This is what solving a debt crisis with more debt looks like though. "Can't even inflate our way out of trouble."

Thu, 09/11/2014 - 18:06 | 5208582 Wait What
Wait What's picture

people who already have money are the ones who get rich from all finance related activity. everyone else gets screwed.

Fri, 09/12/2014 - 04:51 | 5209827 Calculus99
Calculus99's picture

Too true.

Was only speaking to an overworked and underpaid hedge fund trader the other day. He was bemoaning this fact.

Thu, 09/11/2014 - 16:00 | 5208010 Dr Strangemember
Dr Strangemember's picture

Hedge Funds = Charade Extraordinaire!

Thu, 09/11/2014 - 16:01 | 5208012 Dr Strangemember
Dr Strangemember's picture

Hedge Funds = Charade Extraordinaire!

Thu, 09/11/2014 - 16:01 | 5208013 Dr Strangemember
Dr Strangemember's picture

Hedge Funds = Charade Extraordinaire!

Thu, 09/11/2014 - 16:00 | 5208018 long-shorty
long-shorty's picture

suck it, Unigestion Holding!

Thu, 09/11/2014 - 16:03 | 5208030 MidwestJester
MidwestJester's picture

I think you could replace 'hedge fund managers' with 'CEOs' and it would still fit, yeah?

Thu, 09/11/2014 - 16:05 | 5208037 ebworthen
ebworthen's picture

Indirect theft of the public treasury and generations of workers by non-workers.

Supported via the FED, the Treasury Department, and every other branch of our utterly corrupt government.

Thu, 09/11/2014 - 16:08 | 5208053 The Phallic Crusader
The Phallic Crusader's picture

monkeys with dartboards and Ivy League degrees.

Thu, 09/11/2014 - 16:08 | 5208060 Keltner Channel Surf
Keltner Channel Surf's picture

"They say true talent will always emerge in time
. . . 
No expense accounts, or lunch discounts
Or hyping up the charts"

Thu, 09/11/2014 - 16:11 | 5208068 Bell's 2 hearted
Bell's 2 hearted's picture

sad that being prudent (hedging) is unrewarded.

 

Federal Reserve sowing the seeds for a worse collapse (exterminating the shorts ... won't be around to cover when market looking for someone/anyone to buy)

 

Looking forward to getting back in ... when the smoke clears (50%+ drop)

Thu, 09/11/2014 - 16:27 | 5208138 GooseShtepping Moron
GooseShtepping Moron's picture

Hedge funds, despite the name, are not really about hedging properly so called; at least not anymore. The sort of hedging that used to take place (for example, an oil drilling company using forward contracts to offset present expenses) still goes on, but nowadays hedge funds are more about simply outperforming the broader market indices, regardless of the method or theory behind the trade.

Fri, 09/12/2014 - 22:34 | 5213146 DipshitMiddleCl...
DipshitMiddleClassWhiteKid's picture

Indeed, it's a big misoner as most aren't truly hedged..since it costs alot of money to be actually 'hedged'.

 

The best 'fund managers' dont invest other peoples money and you dont hear about them. They're more or less secretive prop shops who have no interest in sharing their 'truth'

 

 

Thu, 09/11/2014 - 16:15 | 5208088 JRobby
JRobby's picture

DuH!!!!

Thu, 09/11/2014 - 16:31 | 5208152 Utah_Get_Me_2
Utah_Get_Me_2's picture

Tell me something I don't know.

Thu, 09/11/2014 - 16:32 | 5208159 DerdyBulls
DerdyBulls's picture

And I used 1.5 seconds to read this headline. Maybe they should unionize.

Thu, 09/11/2014 - 16:40 | 5208194 GeezerGeek
GeezerGeek's picture

100% of politicians are paid more than their true talent warrants.

117% of lawyers are paid more than their true talent warrants.

143% of the FSA is given more than their true talent warrants.

Posters on ZH are generally paid exactly what they are worth, except for the bought-and-paid-for trolls.

Thu, 09/11/2014 - 16:58 | 5208269 Downtoolong
Downtoolong's picture

It is hardly surprising that one fund of funds manager blasts…..” fund managers should be remunerated when they perform. They should not be remunerated for doing nothing."

No offense Nico, but, aren’t fund of funds managers the leading example of useless layering of overpaid financial managers and advisors? What value do you bring to the table for your clients besides hacking away at your providers fees? Do you continue to practice your mantra when it comes to compensating yourself and pass the savings from reduced fees on to your clients?

 

Fri, 09/12/2014 - 11:47 | 5210829 StandardDeviant
StandardDeviant's picture

Exactly!  Imagine what Taleb would say.  He's harsh enough about the abilities of regular fund managers.

Thu, 09/11/2014 - 17:08 | 5208334 CHX
CHX's picture

Talent? Insider knowledge, massive credit lines (to allow directional movement of markets), and a fat salary, all while gambling with other peoples money. Must feel so great.  

Thu, 09/11/2014 - 17:19 | 5208379 JuliaS
JuliaS's picture

America's got talent.

Thu, 09/11/2014 - 17:29 | 5208418 MeBizarro
MeBizarro's picture

Biggest racket around and even more useless than PE firms.  Going to be interesting to see as the SEC starts sniffer a bit closer and finds some of the shenanigans (felonies) that are being committed by hedge funds in regards to how and when they charge 'fees' to their investors.

Bloomberg runs his share of unflattering stories on them.  Love to get his $.02 cents in private about what he actually things of them.  Always assuming to see the hedge fund guys in the comments section respond too.

Thu, 09/11/2014 - 18:23 | 5208641 venturen
venturen's picture

The question is what is their talent? Investing...LOL. It is being an ex-alumi of a major bank, with a paid cadre of Washington insiders, and will to pay off stupid asset managers to take their money and lose it...for a 2/25 fee. The days of them actually investing are done...they are just wall street boiler rooms of scams!

Thu, 09/11/2014 - 21:41 | 5209211 Angelo Misterioso
Angelo Misterioso's picture

If you have a better, cheaper, more reasonable model then by all means launch it and soon all those hedge funds will be losing assets to your new firm.  That's kinda how capitalism works i thought.  No one is forcing anyone to leave their money in any of these "overpriced" funds...

 

Who appointed all these commenters to be arm-chair social equalizers and planners anyway? 

Fri, 09/12/2014 - 11:51 | 5210846 StandardDeviant
StandardDeviant's picture

I think the model you're after is called an ETF.  They did very well last year (see Figure 2.12).

Fri, 09/12/2014 - 22:32 | 5213143 DipshitMiddleCl...
DipshitMiddleClassWhiteKid's picture

Most hedge funds are clandenstine criminal organizations in disguise.

 

Some of them are CIA/NSA funded and the proceeds are used for...things.

Want to know why the rich get rich? There are no insider trading laws on currency / commodity trading.

 

if your pals with the central bankers of government and know when the interest rates are going to get hiked up or down..its pretty easy to make 'more money than god'

 

 

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