“Fund of Funds Are a Cancer”
The Quote of the Day comes from David Swensen, Yale University’s endowment’s chief investment officer, in Tuesday’s WSJ:
Fund of funds are a cancer on the institutional-investor world. They facilitate the flow of ignorant capital. If an investor can’t make an intelligent decision about picking managers, how can he make an intelligent decision about picking a fund-of-funds manager who will be selecting hedge funds? There’s also more fees on top of existing fees. And the best managers don’t want fund-of-fund money because it is unreliable. You need to be in the top 10% of hedge funds to succeed. In a fund of funds, you will likely be excluded from the best managers . . .
Consultants make money by giving advice to as many people as possible. But you outperform by finding inefficiencies most of the market has not yet uncovered. So consultants ultimately end up doing a disservice to investors.
(emphasis added)
That’s about right . . .
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Source:
Yale’s Investor Keeps Playbook
CRAIG KARMIN
WSJ, JANUARY 13, 2009
http://online.wsj.com/article/SB123180744823875647.html
January 14th, 2009 at 2:22 pm
I would also add LAZY after ignorant. It’s probably the bigger reason fund of funds exist. People are lazy and the fees are easy.
January 14th, 2009 at 2:26 pm
Give me a break – Swensen complains about the dual layer of fees and then goes on to say he has a staff of 25 analysts.
Are his analysts volunteers?
January 14th, 2009 at 2:39 pm
Funds of funds are about to go the way of the dinosaurs. Or, in some cases, to the Danbury Federal Prison.
January 14th, 2009 at 2:42 pm
Paying 25 analysts is cheaper than 2% on a billion.
January 14th, 2009 at 2:49 pm
Help me out with the statement “You need to be in the top 10% of hedge funds to succeed.” To me, it reads like only 10% of funds are desirable, or perhaps only 10% are beating the market. But if that were the case, hedge funds surely couldn’t have enjoyed the reputations they (used to) have.
January 14th, 2009 at 2:56 pm
That’s got to be the most ignorant statement of the day. “MISD”! by the same logic, people that can’t make an inteligent decision about ______, can’t make an inteligent decision about somone who picks _____ for them. This would (and does) apply to stocks/mutual funds, articles/blogging, and many other things. It’s a trust issue with the market right now. If Yale couldn’t decide how to invest their money, how in the world could they pick someone who’s good at picking investments. Either this applies to everything or nothing. The guy who said it MISSED and the guy who quoted him MISSED as well. Sowwy.
January 14th, 2009 at 2:56 pm
So no one with less then a billion should invest in anything except long only managers? My point is HFOFs are more economical then paying your own staff for smaller institutions.
January 14th, 2009 at 2:59 pm
David Swensen: “Nothing Jim Cramer says can help investors make better decisions.”
January 14th, 2009 at 3:04 pm
Mr. Swensen is clearly making a reference to the Tier-1 institutional segment of the global markets. While Yale certainly has access to most of the best-of-breed managers in the world, I don’t believe this is the case for global Tier 2 and 3. Additionally, Private Banking clients could greatly benefit from a broad-based and optimized multi-asset class alternative F-o-F product as many would not have access to best-of-breed managers or the required capital to properly build a comprehensively diversified portfolio. Fees of F-o-F are becoming more flexible and are addressing the needs of the clients. In a top ten Tier-1 world, Mr. Swensen’s comments are most definitely valid however, I don’t belief that they should be viewed as a universal truth across all client segments.
January 14th, 2009 at 3:10 pm
First, to Ken’s comment above, the WSJ did an article on hedge funds I think sometime very early last year or late 07 and it showed the average 5 year return on a hedge fund was about 8%, more are NOT beating the market even though the reputation might imply most of them DO.
Barry, don’t limit this discussion to hedge fund fof’s, the mutual fund versions are just as criminal, maybe even worse.
January 14th, 2009 at 3:14 pm
As a general proposition, I would say that, given the benefit of hindsight and a multi-billion dollar portfolio, it is better to be invested or otherwise aligned with the top 10% of anything. That reads like a madlib. How you identify that 10% is not clear.
And to the larger point, there are still, in my opinion, benefits to the FOF model. There are a lot of FOFs that operate at 1 and 10 or less, and when managed appropriately, can in part mimick the broad alt diversification possible with a billion dollar portfolio. The argument about “ignorant capital” is fundamentally flawed. That a single investor may not have the ability or time to select a series of managers across disparate asset classes and strategies dose not by necessity imply that the investor is incapable of selecting a handful or a single manager.
Oh, and nice of the WSJ to lead with the amazing performance of the Yale endowment through Q2 08, as the 25% they’ve lost since wouldn’t fit in with the sage manager meme to well.
January 14th, 2009 at 3:19 pm
There’s going to be a significant winnowing down of hedge funds due to the bear market alone, even apart from the Madoff mess.
And to the extent that the FOF’s (“funds of funds”) get sued and have to pay settlements and jury awards, there’s likely to be a decimation of the FOF’s.
But those hedge fund managers who survive will enjoy sharply diminished competition once the next bull market gets underway (whenever that might be).
January 14th, 2009 at 3:23 pm
Many of the “fat cats” who gave their money to FOF’s would have been better off just buying SPY (or a mix of SPY and TLT).
At least those are liquid.
January 14th, 2009 at 3:36 pm
Just another example of the sham Wall Street has become. These people are only interested in lining their own pockets. Now all the blood sucking lawyers will get their share. If FOF’s are a cancer than Hedge Funds are an epidemic.
January 14th, 2009 at 4:00 pm
It’s all about the fees, baby….!!
FoF = Fees on top Of Fees.
January 14th, 2009 at 7:10 pm
I believe it was Neal Cabuto who said that fund of funds makes fund of fawns of us all; for the jaws of the mountain cat feeding on our tripe will not be long in coming.
January 14th, 2009 at 7:49 pm
Hedge funds take 20% of profits and 2% of assets; Fund of Funds are 10% and 1%. It adds up to 30% and 3%. I don’t know what percentage of managers can overcome those expenses but if its better than 1/1000 I ‘d be surprised. So anybody (Mort Zuckerman are you listening?) who will pay that vigorish doesn’t deserve to have the money in the first place.
January 14th, 2009 at 9:07 pm
The quote also makes a mockery of the stated reasons for excluding the lower classes from participation in hedge funds. As does the entire hedge fund fiasco generally, but most particularly the bailouts. If investing in hedge funds is ‘too risky’ for those with low networth, then bailing out hedge funds must be too risky for them too. Oh, wait, my bad, I keep thinking there is something called logic, and fairness, and sociatal benefit. I forgot we live in a fact free world in which the only interest is the interest of the wealthy.
January 15th, 2009 at 1:45 am
Mort? I hear he’s putting his dough into Arianna Huffington’s web. Can’t tell you what kind of vigorish she’s putting out, though.
January 15th, 2009 at 4:38 am
How’s Ron Insana’s FoF? What’s it a feeder to?
January 15th, 2009 at 9:30 am
@ NormanB
Fund of Funds are not 10% and 1%, in fact for institutional investors fees are generally a flat 1%. FoF can offer a reasonable way for small institutions to gain access to uncorrelated returns, as long as that remains true they aren’t going anywhere.
January 15th, 2009 at 2:40 pm
@Raoul Duke
Ok, some don’t get 10% of profits but the 1% is still a big hurdle on top of the 20% and 2%. So, instead of my guess of 1/1000 being able to beat the averages maybe its 1/500. Who is good enough to find that needle-in-the-haystack? A more reasonable way to get uncorrelated returns is to throw some darts at a list of assets and don’t pay the 20% and 3%. I’ll bet on the darts.