Make a billion bucks a year by losing money for your investors

[forummm]

Ray Dalio, 66, made $1.4 billion in 2015 through Bridgewater Associates, the world’s biggest hedge fund firm with $150 billion of assets under management. Mr. Dalio, who founded Bridgewater, is frequently quoted promoting a strategy he calls risk parity. Yet Bridgewater’s risk parity fund, called All Weather, lost investors 7 percent in 2015.

http://www.nytimes.com/2016/05/10/business/dealbook/hedge-fund-manager-compensation.html

[Aphalite]

In this world, if you can sell yourself, you can do anything in life

[onlykelsey]

I agree that it's obscene, but given the accredited investor and qualified purchaser standards, and the general minimum buy in amounts (often 8 figures), I think this gets too much attention.  Sophisticated, filthy rich investors make bad choices and pay managers too much.  I'm not too concerned.

[AdrianC]

I agree that it's obscene, but given the accredited investor and qualified purchaser standards, and the general minimum buy in amounts (often 8 figures), I think this gets too much attention.  Sophisticated, filthy rich investors make bad choices and pay managers too much.  I'm not too concerned.

Agree. A much bigger issue, and one we see here all the time, is the ripping off of the average investor via high cost mutual funds.

[forummm]

I agree that it's obscene, but given the accredited investor and qualified purchaser standards, and the general minimum buy in amounts (often 8 figures), I think this gets too much attention.  Sophisticated, filthy rich investors make bad choices and pay managers too much.  I'm not too concerned.

Agree. A much bigger issue, and one we see here all the time, is the ripping off of the average investor via high cost mutual funds.

I differ somewhat. If some rich individuals lose some money, that's their problem. But a lot of these big hedge fund investors are large endowments or pension funds. And that totally sucks. It means less money for the charitable causes or for people's retirement. Or some government has to come up with money to replace it (i.e. taxes us more).

[onlykelsey]

I agree that it's obscene, but given the accredited investor and qualified purchaser standards, and the general minimum buy in amounts (often 8 figures), I think this gets too much attention.  Sophisticated, filthy rich investors make bad choices and pay managers too much.  I'm not too concerned.

Agree. A much bigger issue, and one we see here all the time, is the ripping off of the average investor via high cost mutual funds.

I differ somewhat. If some rich individuals lose some money, that's their problem. But a lot of these big hedge fund investors are large endowments or pension funds. And that totally sucks. It means less money for the charitable causes or for people's retirement. Or some government has to come up with money to replace it (i.e. taxes us more).

Yeah, but those investors form a decreasing share of the investor base and, honestly, should be held to some level of competence.  I can't imagine a system that keeps poor institutional endowments and pension funds (with their sophisticated international counsel) out of hedge funds, although I agree that most are a bad idea for most investors.   If a sovereign wealth fund or state retirement plan can't make appropriate risk analysis decisions, I'm not sure who could be charged with overseeing them.  It seems unworkable. 

Obviously there are problems with fraud by managers (and investors) and kickbacks, and those should be rooted out.

[GuitarStv]

Sounds like he's following the homeopathic route to wealth generation.  Dilute the money until there's nothing left.  Then you'll be rich!

[Tyler]

Setting aside the question of whether Dalio deserves a billion dollars a year for what he does, I personally don't think criticizing him for losing a meager 7% last year is a reasonable critique.  No fund should be expected to always make money, and managing the cash flow requirements of institutional billions is a lot more complicated than you and I opening a Vanguard account.   I respect Dalio and believe his reputation is well-earned, and Bridgewater is the world's largest hedge fund for a reason.

That said, regular Joes like us don't need to pay someone like Dalio to achieve good results.

[onlykelsey]

Setting aside the question of whether Dalio deserves a billion dollars a year for what he does, I personally don't think criticizing him for losing a meager 7% last year is a reasonable critique.  No fund should be expected to always make money, and managing the cash flow requirements of institutional billions is a lot more complicated than you and I opening a Vanguard account.   I respect Dalio and believe his reputation is well-earned, and Bridgewater is the world's largest hedge fund for a reason.

That said, regular Joes like us don't need to pay someone like Dalio to achieve good results.

Agreed.  Also, some funds very actively do NOT pursue gains every year. Some funds find investors looking for results not correlated to the market, for example, to diversify their portfolio a bit.  Those funds would, you'd expect, be down in years when PE investments are up. It's not meant as a complete investment, hence all the requirements about your investment NOT being a substantial amount of your net worth.

[forummm]

Setting aside the question of whether Dalio deserves a billion dollars a year for what he does, I personally don't think criticizing him for losing a meager 7% last year is a reasonable critique.  No fund should be expected to always make money, and managing the cash flow requirements of institutional billions is a lot more complicated than you and I opening a Vanguard account.   I respect Dalio and believe his reputation is well-earned, and Bridgewater is the world's largest hedge fund for a reason.

That said, regular Joes like us don't need to pay someone like Dalio to achieve good results.

Agreed.  Also, some funds very actively do NOT pursue gains every year. Some funds find investors looking for results not correlated to the market, for example, to diversify their portfolio a bit.  Those funds would, you'd expect, be down in years when PE investments are up. It's not meant as a complete investment, hence all the requirements about your investment NOT being a substantial amount of your net worth.

Not buying it. I'm not going crazy about him losing 7% for his investors even though the market was flat. It's paying him $1.4 billion for the sucky performance. That's BS.

[onlykelsey]

Setting aside the question of whether Dalio deserves a billion dollars a year for what he does, I personally don't think criticizing him for losing a meager 7% last year is a reasonable critique.  No fund should be expected to always make money, and managing the cash flow requirements of institutional billions is a lot more complicated than you and I opening a Vanguard account.   I respect Dalio and believe his reputation is well-earned, and Bridgewater is the world's largest hedge fund for a reason.

That said, regular Joes like us don't need to pay someone like Dalio to achieve good results.

Agreed.  Also, some funds very actively do NOT pursue gains every year. Some funds find investors looking for results not correlated to the market, for example, to diversify their portfolio a bit.  Those funds would, you'd expect, be down in years when PE investments are up. It's not meant as a complete investment, hence all the requirements about your investment NOT being a substantial amount of your net worth.

Not buying it. I'm not going crazy about him losing 7% for his investors even though the market was flat. It's paying him $1.4 billion for the sucky performance. That's BS.

Is it BS when the investors knew how compensation was calculated going in?  It's not discretionary (unlike public company executive compensation).  I agree that a lot of investors shouldn't be in hedge funds (i'm thinking state and city pensions who have underfunded for decades [through their or politicians' fault] and now are looking for 20% miracle returns to meet next year's disbursements), but that seems like a separate issue and not on the securities regulators to fix.

[matchewed]

Aren't we kinda judging in a bubble without the details behind the strategy? Mind you I'm not advocating using it.

[forummm]

Setting aside the question of whether Dalio deserves a billion dollars a year for what he does, I personally don't think criticizing him for losing a meager 7% last year is a reasonable critique.  No fund should be expected to always make money, and managing the cash flow requirements of institutional billions is a lot more complicated than you and I opening a Vanguard account.   I respect Dalio and believe his reputation is well-earned, and Bridgewater is the world's largest hedge fund for a reason.

That said, regular Joes like us don't need to pay someone like Dalio to achieve good results.

Agreed.  Also, some funds very actively do NOT pursue gains every year. Some funds find investors looking for results not correlated to the market, for example, to diversify their portfolio a bit.  Those funds would, you'd expect, be down in years when PE investments are up. It's not meant as a complete investment, hence all the requirements about your investment NOT being a substantial amount of your net worth.

Not buying it. I'm not going crazy about him losing 7% for his investors even though the market was flat. It's paying him $1.4 billion for the sucky performance. That's BS.

Is it BS when the investors knew how compensation was calculated going in?  It's not discretionary (unlike public company executive compensation).  I agree that a lot of investors shouldn't be in hedge funds (i'm thinking state and city pensions who have underfunded for decades [through their or politicians' fault] and now are looking for 20% miracle returns to meet next year's disbursements), but that seems like a separate issue and not on the securities regulators to fix.

Again, if rich individuals want to make poor and expensive decisions with their money, that's fine. But I think it's bad that pensions and endowments get snookered in by the sales job that high fee active management does anything but enrich the fund manager. It's a shame that the people entrusted with the public's money are incompetent and unsavvy enough to buy into the claims and pay such monster fees.

I never suggested that there should be regulation to prevent pension funds from investing in high fee funds. But since you keep raising the idea, I'm not immediately opposed to it either. I was just lamenting the waste, which will eventually come out of our pockets.

[onlykelsey]

Again, if rich individuals want to make poor and expensive decisions with their money, that's fine. But I think it's bad that pensions and endowments get snookered in by the sales job that high fee active management does anything but enrich the fund manager. It's a shame that the people entrusted with the public's money are incompetent and unsavvy enough to buy into the claims and pay such monster fees.

I never suggested that there should be regulation to prevent pension funds from investing in high fee funds. But since you keep raising the idea, I'm not immediately opposed to it either. I was just lamenting the waste, which will eventually come out of our pockets.

I don't think that's fair, you highlighted the 7% loss in your original post, not the amount he was paid. 

Agreed, the waste is stupid, and may be borne by us as taxpayers (or younger state employees).  I just don't see a workable solution, unless they are not warned up front (they are) or are lied to (obviously a bad thing we have securities fraud laws for) or forced to invest (they're not, they send their money of their own free will after a multi-month analysis).  U.S. states are all over their pension funds and require all sort of reporting and risk management and representations from funds they invest in.  It wasn't always true, but it definitely is now.  It doesn't really guarantee returns.  I think that, honestly, investors who don't have full staffs evaluating the risk don't really have business in a lot of the alternative investment space.  Of course they're between a rock and a hard place (see Christie refusing to fund NJ's Common Pension fund for 2? 3? years) and if they don't produce returns, they're in hot water, so you can see why they're interested.

Most states have wised up to this, though.  Large public institutional investors have largely cut hedge fund investments out of their portfolio. CalPERS killed their hedge fund program 18 months ago, for example, as a gold standard.  When there's enough pushback, states do bend. 

[forummm]

Again, if rich individuals want to make poor and expensive decisions with their money, that's fine. But I think it's bad that pensions and endowments get snookered in by the sales job that high fee active management does anything but enrich the fund manager. It's a shame that the people entrusted with the public's money are incompetent and unsavvy enough to buy into the claims and pay such monster fees.

I never suggested that there should be regulation to prevent pension funds from investing in high fee funds. But since you keep raising the idea, I'm not immediately opposed to it either. I was just lamenting the waste, which will eventually come out of our pockets.

I don't think that's fair, you highlighted the 7% loss in your original post, not the amount he was paid. 

Agreed, the waste is stupid, and may be borne by us as taxpayers (or younger state employees).  I just don't see a workable solution, unless they are not warned up front (they are) or are lied to (obviously a bad thing we have securities fraud laws for) or forced to invest (they're not, they send their money of their own free will after a multi-month analysis).  U.S. states are all over their pension funds and require all sort of reporting and risk management and representations from funds they invest in.  It wasn't always true, but it definitely is now.  It doesn't really guarantee returns.  I think that, honestly, investors who don't have full staffs evaluating the risk don't really have business in a lot of the alternative investment space.  Of course they're between a rock and a hard place (see Christie refusing to fund NJ's Common Pension fund for 2? 3? years) and if they don't produce returns, they're in hot water, so you can see why they're interested.

Most states have wised up to this, though.  Large public institutional investors have largely cut hedge fund investments out of their portfolio. CalPERS killed their hedge fund program 18 months ago, for example, as a gold standard.  When there's enough pushback, states do bend. 

I mentioned the billion bucks in the title of the thread. But I guess I'm so used to excessively high "earnings" for managers that I thought it was more amazing that he got paid that much to lose money.

Christie did some shenanigans where he moved some of the funds over to a manager who charged high fees and coincidentally also happened to donate a lot of money to Christie's campaigns.

I was glad to see CalPERS scaling back.

[MustacheAndaHalf]

"It's paying him $1.4 billion for the sucky performance."

He runs another fund that charges the standard "2% of assets, 20% of profits".  If that applies here, it means investors coughed up $3 billion (of $150 billion assets) to pay the fund.

In the movie/film "The Big Short" Michael Burry loses investors ~20% and they go ballistic... even though his expenses are "at cost" (not 2%) and he wound up quintupling their money.  Kinda wish more hedge funds operated at cost, and only took a percent of high water mark profits... not that I'm investing in them.

[hodedofome]

Judging anyone's performance using 1 year of data is ignorant. What's been his performance for the past 25 years? It's in the double digits with low volatility and drawdowns.

Institutions are happy to make the minimum $100 million investment in Bridgewater because they have an incredible track record of trashing the S&P's performance. And they have a repeatable process which most people can understand.