Author Topic: Managed funds  (Read 4012 times)

mxt0133

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Managed funds
« on: December 23, 2014, 09:25:52 PM »
Something to think about for those of you still on the fence about passive vs actively managed funds.

http://www.bloomberg.com/news/2014-12-24/meredith-whitney-s-fund-sued-by-billionaire-platt-s-bluecrest.html

If that is not enough to convince you then think about the fees, typical hedge funds charge 2/20 which means 2% of assets plus 20% of gains, granted they have high watermarks where if the fund does great one year then that is used as the new cost basis for gains ( which is why hedge funds close down when they have a string of bad years to reset the high watermark).  So if the average fund only gained 2% for the first 11 months of the year then the investors were basically even for the year.

If you are not invested in hedge funds then consider what people are paying financial advisors that charge 1-2% of assets that just put them in actively manged funds that themselves charge .5-2% and that's the optimistic case where the funds don't have front-end load fees which can reach 5%.

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Re: Managed funds
« Reply #1 on: December 24, 2014, 05:25:32 AM »
Absolutely, management fees can and will eat up a big chunk of what should have gone into your pocket.  At a minimum, no one should ever even consider engaging an investment advisor that is not compensated on a flat-fee basis.  Of course, the best alternative is not to use financial advisors at all.  If they REALLY knew what they were doing, they would already BE rich and not have to hold down that investing advisor job at all.   Same goes for mutual fund managers.  ;)

LordSquidworth

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Re: Managed funds
« Reply #2 on: December 24, 2014, 07:55:28 AM »
Something to think about for those of you still on the fence about passive vs actively managed funds.

http://www.bloomberg.com/news/2014-12-24/meredith-whitney-s-fund-sued-by-billionaire-platt-s-bluecrest.html

What's a hedge fund have to do with an actively managed mutual fund?

Probably 95%-97% of people shouldn't be in hedge funds to begin with.

If that is not enough to convince you then think about the fees, typical hedge funds charge 2/20 which means 2% of assets plus 20% of gains, granted they have high watermarks where if the fund does great one year then that is used as the new cost basis for gains ( which is why hedge funds close down when they have a string of bad years to reset the high watermark).  So if the average fund only gained 2% for the first 11 months of the year then the investors were basically even for the year.

If you are not invested in hedge funds then consider what people are paying financial advisors that charge 1-2% of assets that just put them in actively manged funds that themselves charge .5-2% and that's the optimistic case where the funds don't have front-end load fees which can reach 5%.

You're again comparing hedge funds to mutual funds. They're not the same.

If you have an adviser the fund shares used are Class I. No load fees, reduced management fee. Competitive advisers these days will have their fees down as low as .75%.

** If you're going to bash something, at least get your facts straight first. **

Absolutely, management fees can and will eat up a big chunk of what should have gone into your pocket. At a minimum, no one should ever even consider engaging an investment advisor that is not compensated on a flat-fee basis. True Of course, the best alternative is not to use financial advisors at all. Not at all. That might be the best ideal option, but there's too many people out there that are safer with an adviser. If they REALLY knew what they were doing, they would already BE rich and not have to hold down that investing advisor job at all.   Same goes for mutual fund managers.  ;)


Why do any of us do what we're good at?

If they're already rich why wouldn't they continue doing what they're apparently good at if they became rich doing it? Fund manager and financial advisers are jobs where they're front loaded, meaning the hardest periods are the first few years, after that it becomes much more steamlined.



** Yes, in an ideal world we would all manage our own money. However, a lot of people simply do not have that ability. I dream of a Utopia too, but then I remember we're human and it's more likely never going to happen. **
« Last Edit: December 24, 2014, 08:01:31 AM by LordSquidworth »

mxt0133

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Re: Managed funds
« Reply #3 on: December 24, 2014, 10:59:53 AM »
If they REALLY knew what they were doing, they would already BE rich and not have to hold down that investing advisor job at all.   Same goes for mutual fund managers.  ;)

I'm going to have to disagree with this statement.  Most people like to work even if they are rich/wealthy/FI, I am in the camp that believes there is intrinsic value in work.  Others continue to work because it is their life or they seek the status that their jobs give them.  People like Warren Buffet, Bill Gates, and our high priest MMM still work even if they are rich.

@LordSquidworth - I lump hedge funds and actively managed funds because they have significantly higher fees than passive funds.  Due to their trading activities which incur execution costs, taxable events, marketing costs (they have to justify the higher fees somehow, and additional staff of analysts (to justify their trades), these activities cause significant drag on investment returns.  Fund expenses have the biggest impact on long term returns for investors.

What facts did I state that were incorrect?

As far as ability I would say that there are more people with the ability to manage their own money than those that mentally cannot, it's basic arithmetic and reading comprehension.  The majority of people that use financial advisers are professional with college degrees or business owners, I doubt that they are not 'able' to manage their own money.  Motivation and will is another matter.  One reason that most people don't manage their money is because of lack of education and to some extent the propaganda spread by the financial industry that you need a rocket scientist with a PhD to manage money.


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Re: Managed funds
« Reply #4 on: December 24, 2014, 06:20:57 PM »
Take all the money being managed by active funds that invest in large cap stocks.  They own everything in the S&P 500.  Lets say the S&P 500 is up 10% this year.

Active funds as a group VS S&P 500 VS Low cost 500 index fund
10%_____________Vs________10%______VS_____10%
-trading fees______________no fees______________no trading
-taxes on trades___________no taxes_____________very tax efficient due to no trading
-management fees(1%)______no fees_____________0.05%
-12b1 fees(0.25%)__________no fees______________nope
-sales loads(5.75%)_________no fees______________nope
8-9%*____________________10%_______________9.95%

*I left out the sales load for the first year, obviously that would put the active fund way behind the index in the first year when you pay the commission. 

Since you can't buy the S&P 500 directly a cheap index fund is the clear winner.  You can take this and apply it to any segment of the market; small cap stocks, international stocks, bonds, etc.  The index... and by default low cost index funds will outperform active managers as a group.  Its math.  Sure every year a few active funds will beat the index(VERY few in 2014), but very few are consistent.  You might get lucky and pick a winner, but the odds are not in your favor.

hodedofome

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Re: Managed funds
« Reply #5 on: December 24, 2014, 08:24:17 PM »
There's a lot of hedge funds that aren't trying to beat the S&P on an absolute basis, rather they are trying to make uncorrelated returns with less risk. Comparing them to the S&P is ignorant. Rather compare them to a balanced portfolio and you may appear a little smarter.

That being said, I've seen guys that made it their livelihood to invest in hedge funds and they beaten the pants off the S&P for decades.


Indexer

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Re: Managed funds
« Reply #6 on: December 24, 2014, 09:33:55 PM »
There's a lot of hedge funds that aren't trying to beat the S&P on an absolute basis, rather they are trying to make uncorrelated returns with less risk. Comparing them to the S&P is ignorant. Rather compare them to a balanced portfolio and you may appear a little smarter.

That being said, I've seen guys that made it their livelihood to invest in hedge funds and they beaten the pants off the S&P for decades.

I used the SP500 as an example of active funds VS passive funds, and not anything to do with hedge funds specifically.  Actually I never mentioned a hedge fund in my entire post.  Again you can apply the passive VS active argument to 'any' market segment, and the whole last paragraph of my post was dedicated to that point so please read posts fully before making judgements.  It might make you appear a little smarter(and I'm normally pretty nice guy, but you asked for that one ;) ).  Passive(cheaper/less trading) as a group will outperform active(expensive/more trading) as a group, its math. 

I've also seen guys make a killing in hedge funds.  The managers!

http://www.barclayhedge.com/products/list-of-hedge-funds.html

According to Barclays the average hedge fund has returned 1.29% this year. 
The highest was 36.65%(impressive if you happened to be in it).
The lowest was negative 31.71% this year.  In 2008 they averaged returns of negative 18.3%, and the worst were down over 90%.

Hedge funds all do different things so you are correct that its unfair to compare them to the 500 index.  However 1.29% puts hedge funds below every other major asset class this year except cash, some commodities(oil), and international stocks.  So just about any 'balanced portfolio' would have demolished hedge funds this year.  So what exactly are all the fees for?

hodedofome

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Re: Managed funds
« Reply #7 on: December 25, 2014, 05:09:32 AM »
There's a lot of hedge funds that aren't trying to beat the S&P on an absolute basis, rather they are trying to make uncorrelated returns with less risk. Comparing them to the S&P is ignorant. Rather compare them to a balanced portfolio and you may appear a little smarter.

That being said, I've seen guys that made it their livelihood to invest in hedge funds and they beaten the pants off the S&P for decades.

I used the SP500 as an example of active funds VS passive funds, and not anything to do with hedge funds specifically.  Actually I never mentioned a hedge fund in my entire post.  Again you can apply the passive VS active argument to 'any' market segment, and the whole last paragraph of my post was dedicated to that point so please read posts fully before making judgements.  It might make you appear a little smarter(and I'm normally pretty nice guy, but you asked for that one ;) ).  Passive(cheaper/less trading) as a group will outperform active(expensive/more trading) as a group, its math. 

I've also seen guys make a killing in hedge funds.  The managers!

http://www.barclayhedge.com/products/list-of-hedge-funds.html

According to Barclays the average hedge fund has returned 1.29% this year. 
The highest was 36.65%(impressive if you happened to be in it).
The lowest was negative 31.71% this year.  In 2008 they averaged returns of negative 18.3%, and the worst were down over 90%.

Hedge funds all do different things so you are correct that its unfair to compare them to the 500 index.  However 1.29% puts hedge funds below every other major asset class this year except cash, some commodities(oil), and international stocks.  So just about any 'balanced portfolio' would have demolished hedge funds this year.  So what exactly are all the fees for?
I wasn't talking to you, the OP referenced hedge funds. But thanks for getting defensive about it.


mxt0133

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Re: Managed funds
« Reply #8 on: December 25, 2014, 06:53:40 AM »
There's a lot of hedge funds that aren't trying to beat the S&P on an absolute basis, rather they are trying to make uncorrelated returns with less risk. Comparing them to the S&P is ignorant. Rather compare them to a balanced portfolio and you may appear a little smarter.

That being said, I've seen guys that made it their livelihood to invest in hedge funds and they beaten the pants off the S&P for decades.

All very valid points.  For institutional investors and high net worth individuals I agree hedge funds are very useful to diversifying a portfolio.  I have operational experience with this as I work for a financial services company that develops trading and accounting applications for investment banks and hedge funds.

However, in the context of this blog which the majority of members and readers are not institutional investors or high net worth individuals (8 figure and above) there are more efficient ways to diversify one's portfolio.

hodedofome

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Re: Managed funds
« Reply #9 on: December 25, 2014, 08:25:05 AM »
For sure, I think we're on the same page.

Indexer

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Re: Managed funds
« Reply #10 on: December 25, 2014, 07:30:17 PM »
I wasn't talking to you, the OP referenced hedge funds. But thanks for getting defensive about it.

You said comparing to the S&P 500 was ignorant right after a post where I spent a lot of time talking about comparing to the S&P 500.  Outside of a link to another website no one else has said anything about the S&P so it was a logical conclusion you were speaking with me.  I'm sure someone reading the posts in order would likely assume the same thing.   Sorry for any confusion.

Still the numbers for hedge funds are pretty horrific so I have no clue why anyone would invest in them.