Posts filed under “Mathematics”

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

Tax Rates, Inequality, and US Deficits

Its Friday, after what was for me a long and annoying 17 days. But the shutdown is over, US markets are at all time highs, and Bob Shiller got his Nobel (more on this tomorrow). You might think that I would be at peace with the current state of the world, but life is never…Read More

Category: Economy, Mathematics, Philosophy, Taxes and Policy

The Truth About the Deficit

Yesterday, I was on Pete Dominick’s Sirius XM Satellite radio show (audio below). A caller asked about how to close the deficit. His comments revealed that his concern about the deficit was merely a ruse, a tool to be used to achieve very different goals. If you are truly concerned about deficit, then what you…Read More

Category: Mathematics, Politics, Really, really bad calls

What makes us bad investors?

What makes us bad investors? from morganhousel by morganhousel on Jul 14, 2013

Category: Investing, Mathematics, Psychology, Think Tank

Twelve Musical Tones

Vi Hart, explores the nature of randomness and pattern, using Stravinsky’s 12-tone music as a starting-point and rocketing through constellations, the nature of reality. Twelve Tones hat tip boingboing

Category: Mathematics, Music, Weekend

Does Math Exist or Is It a Human Creation?

Math is invisible. Unlike physics, chemistry, and biology we can’t see it, smell it, or even directly observe it in the universe. And so that has made a lot of really smart people ask, does it actually even EXIST?!?! Similar to the tree falling in the forest, there are people who believe that if no person existed to count, math wouldn’t be around . .at ALL!!!! But is this true? Do we live in a mathless universe? Or if math is a real entity that exists, are there formulas and mathematical concepts out there in the universe that are undiscovered? Or is it all fiction? Whew!! So many questions, so many theories… watch the episode and let us know what you think!

Is Math a Feature of the Universe or a Feature of Human Creation? | Idea Channel | PBS

Hat tip boingboing

Category: Mathematics, Philosophy, Video

Possible versus Probable

Its Friday, and has become my wont, this is the day of the week I like to kick back, wax philosophical about various thoughts kicking about me noggin. One of the things that I have been noticing of late is the way so many people seem to confuse facts with forecasts. Twitter is rife with…Read More

Category: Hedge Funds, Investing, Mathematics, Philosophy, Venture Capital

Most Human Males Never Retired (they just died)

Click to enlarge Source: The Motley Fool   “The entire concept of retirement is unique to the late-20th century. Before World War II, most Americans worked until they died.”   The quote above is from Morgan Housel. He has become the most consistently interesting writer on Motley Fool (a site I never really grokked). I was reminded…Read More

Category: 401(k), Employment, Investing, Mathematics

How You Are Unlikely to Die

Awesome graphic via The Economist: click for giant graphi

Category: Digital Media, Mathematics, Weekend

10 Thursday PM Reads

My afternoon train reading: • Your Brain in Love (Scientific American) • Big Wall Street Buyouts Might Be a Bullish Sign (The Slant) • Less-Trusting Millennial Investors Pose Challenge to Advisors (Advisor One) • The Biggest Financial Asset in Your Portfolio Is You (NYT) • Why Inflation Doves Are Really Hawks (Employment, Interest, and Money)…Read More

Category: Markets, Mathematics