Happy New Year, everyone.
A few days ago I came across a terrific post by Terry Smith on his blog, Straight Talking. Using Warren Buffett's investment returns, he illustrates why the two-and-twenty standard is egregious. Hedge funds win disproportionately when they charge 2 percent on assets and keep 20 percent of the profits.
Here's what Smith writes:
As you are aware, Warren Buffett has produced a stellar investment performance over the past 45 years, compounding returns at 20.46% pa. If you had invested $1,000 in the shares of Berkshire Hathaway when Buffett began running it in 1965, by the end of 2009 your investment would have been worth $4.3m.
However, if instead of running Berkshire Hathaway as a company in which he co-invests with you, Buffett had set it up as a hedge fund and charged 2% of the value of the funds as an annual fee plus 20% of any gains, of that $4.3m, $4.0m would belong to him as manager and only $300,000 would belong to you, the investor. And this is the result you would get if your hedge fund manager had equalled Warren Buffett’s performance. Believe me, he or she won’t.
At first I could not believe Smith's conclusion—managers keeping over ten times what their clients make. It was a "say it ain't so" moment. That's why I took a break from college football yesterday to pick through his spreadsheet model.
Bottom line: I can quibble with a few of the model assumptions, but I think Smith's conclusions are right on the money. Hedge fund fees scuk.
* Scuk means what you think it means—but worse.
The New York Times describes my novels as “money porn,” “a red-hot franchise,” and “glittery thrillers about fiscal malfeasance.” Through fiction I explore the dark side of money and the motivations of those who have it, want more, and will steamroll anybody who gets in their way.
Hello Norb, Thank you for quantifying the “scuk” factor in the world of high finance wealth “management”. The root cause of such disparity is the notion of entitlement – those managers probably believe they “deserve” 20 times more than their clients for doing such “hard work”. The privileged elite have a difficult time understanding the concept of sufficiency and knowing when “enough” is enough. This is the same malignancy that supports an average annual income of $10 million for S & P 500 CEO’s – more than 300 times higher than the average worker. I’ve not managed to monetize whatever my skills may be, so, on my bad days, I envy such mind boggling income, on my self righteous, bad days, I despise the greed and blatant avarice embodied by the behavior of the “haves” at the expense of the “have nots”!
I hear you, Bud.
Two-and-twenty compensation exists only because investors sanction it by investing their dollars. The $4 vs. $.3 split might be outrageous. But it’s here to stay until investors modify their behavior. I don’t get it.