Posts filed under “Hedge Funds”

What Do Hedge Funds Spend On Regulatory Compliance?

Every now and then, I read an article that is factually accurate, technically correct — and utterly misleading.

Items like this are “accurate but false” as they leave the reader with an impression of something that is incorrect. Because the world is nuanced and not black and white, the sum of many facts, statistics and data can (when skillfully blended) create a completely inaccurate impression.

The latest example of such is a perfectly accurate but utterly misleading article in All About Alpha titled AIMA Survey, Interviews: On Regulatory Costs.

“Hedge fund managers have sustained significant costs in the course of compliance with new regulatory requirements.

According to a new report by the Alternate Investment Management Association, the Managed Funds Association, and KPMG International, small fund managers have invested on average $700,000 in compliance, medium-sized fund managers $6 million, and large fund managers $14 million.

The industry as a whole has spent $3 billion on compliance costs. This is more than 7% of its total operating costs.”

Most people’s immediate emotional response is that $3 billion is a lot of money, and that 7% of its total operating costs is a very significant percentage.

A few obvious problems with the report:

1) That $3 billion in Regulatory Costs is out of more than $2 trillion dollars in assets under management. In other words, their compliance costs are about 1/10th of 1% of AUM. Given that managers get paid 2% plus 20% of profits, this is a teeny percentage.

2) The article fails to inform us if this total operating costs is going up or down relative to recent easing of regulatory requirementsm such as the JOBS act.

3) Finally, the report is based on a survey of 200 hedge fund managers from around the world — out of more than 10,000. Such a small statistical  sample has a very large potential error rate.

To be fair, the regulatory burdens will most likely fall disproportionately upon smaller funds. There are fixed costs inherent in all asset management / trading ventures, and they fall in proportion relative to increase in size. Indeed, the chart below showing the response to the survey — notwithstanding the self-selecting bias inherent thereto — shows the greatest response from smaller funds.



With this post, we introduce the category “Bad Math”.



AIMA Survey, Interviews: On Regulatory Costs
By cfaille
All About Alpha, Oct 27th, 2013

Category: Bad Math, Hedge Funds, Regulation

Skill vs Cost: The Myth of the Successful Money Manager

click for complete infographic
managed funds

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Category: Digital Media, Hedge Funds, Mutual Funds

The Price of Generating Alpha

Alpha is a zero-sum game, according to David Villa of the State of Wisconsin’s Investment Board. Here he talks about how making the right errors leads to high returns.

Category: Hedge Funds, Video

Buffett: Federal Reserve Is Greatest Hedge Fund in History

Billionaire investor Warren Buffett compared the U.S. Federal Reserve to a hedge fund because of the central bank’s ability to profit from bond purchases while accumulating a balance sheet of more than $3 trillion.

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Category: Federal Reserve, Hedge Funds, Video

Bill Ackman, CEO of Pershing Square Capital Management.

Category: Corporate Management, Hedge Funds, Video

1.6% & 18% is the New 2&20

Intriguing if slightly misguided article in the WSJ ( Hedge Funds Cut Back on Fees) about high fees that hedge funds charge, and how they have become somewhat lower. (My only beef with the article is that hedge fund under-performance has been going on for far longer than since the crisis). As I noted in…Read More

Category: Hedge Funds, Investing

Proof the Bond Bull is Over: PIMCO Selling Hedge Funds

If you have been seeking unequivocal proof that the 30 year bull market for bonds is over, look no further than this WSJ headline: Bond-King Pimco Plans to Push ‘Alternative Funds’. Think about what this means: From 1980 to 2013, PIMCO enjoyed three decades of rising bond prices — read falling interest rates — and…Read More

Category: Fixed Income/Interest Rates, Hedge Funds, Investing

“I Am Looking to Outperform the Markets by 4-5% a Year”

Lately, the day job has been inspiring many of our Philosophy Phriday posts. (This coming Sunday’s WaPo column was also inspired by what we see int he office). Today’s post is another such example. Perhaps its because we run a somewhat different business model than is typical in the finance industry in the US. Our…Read More

Category: Apprenticed Investor, Hedge Funds, Investing, Philosophy, Psychology, Really, really bad calls

Vancouver: Romancing Alpha, Forsaking Beta

This is the presentation I gave in Vancouver — its an expanded version of the Institute for Responsible Investing presentation I gave at the Kennedy School./  

Category: Hedge Funds, Investing, Psychology

Interview with Jim Rogers

I am off to this conference this weekend — one of the other keynoter speakers will be Jim Rogers. Last month, Joe Dedona, head trader at our Institutional Desk, sat down with Jim for this interview: ~~~ Fusion MarketSite was fortunate to interview Jim Rogers, co-founder of the Quantum Fund with George Soros. Legendary investor, author and world traveler,…Read More

Category: Hedge Funds, Investing, Think Tank