Mohnish Prabrai and Guy Spier performance

[JSArbitrage]

What kind of other profession pays people an insane amount of money to be below average?

 

Business related professions? All of them.

[Vish_ram]

I already ran the numbers and compared it against SPY (total return)

 

https://www.cornerofberkshireandfairfax.ca/forum/general-discussion/mohnish-pabrai-blog/?action=dlattach;attach=8616

 

Here's the issue for me. I would be willing to bet that on the total aum he has probably underperformed the market. Given that if you take away his first year or two he's underperformed, it's very reasonable to say that he if didn't invest money for a living and that those investors had originally thrown the money into a S&P 500 index they would have been far better off.

 

All the while, he has sucked roughly $40-$80 million out of his investor's pocket. So, this guy has a large net worth but has underperformed the average.

 

What kind of other profession pays people an insane amount of money to be below average?

 

Though I will admit his hedge fund really does play to his investment philosophy - heads I win, tails I don't lose too much (the clients...well, eh don't worry about them).

[stahleyp]

What kind of other profession pays people an insane amount of money to be below average?

 

Business related professions? All of them.

 

Clawbacks should be there too then. I see no reason why a CEO should get paid a ton to suck.

[coc]

I do not understand this line of thinking that "it's your fault if you don't pull your money when the HF manager is on top".

 

So you believe that LTCM or other firms who made lots of money while taking (and hiding) enormous risk, whom collected big fees and then blew up their clients money, are not at fault? It's simply the investor's job to know when to leave?

 

This is serious sophistry. The big returns and the big blowup are both functions of the same strategy!

[RadMan24]

I do not understand this line of thinking that "it's your fault if you don't pull your money when the HF manager is on top".

 

So you believe that LTCM or other firms who made lots of money while taking (and hiding) enormous risk, whom collected big fees and then blew up their clients money, are not at fault? It's simply the investor's job to know when to leave?

 

This is serious sophistry. The big returns and the big blowup are both functions of the same strategy!

 

Who are you quoting, or are you just making an argument for yourself?

[RadMan24]

Further, there's already a fulsome discussion on this topic here: https://www.cornerofberkshireandfairfax.ca/forum/general-discussion/mohnish-pabrai-blog/320/

[Gregmal]

I do not understand this line of thinking that "it's your fault if you don't pull your money when the HF manager is on top".

 

So you believe that LTCM or other firms who made lots of money while taking (and hiding) enormous risk, whom collected big fees and then blew up their clients money, are not at fault? It's simply the investor's job to know when to leave?

 

This is serious sophistry. The big returns and the big blowup are both functions of the same strategy!

 

What most people dont seem to understand, even when dealing with managers with integrity and who take seriously their fiduciary duties; you are buying a product/service...nothing more, nothing less. Results are hardly guaranteed, and these people are running a business. Discussing anything outside of this is a waste of time.

 

So you are kind of right...it isn't really the investors fault for knowing when to pull the money, but it is their responsibility to understand what they are putting their money in to.

[SharperDingaan]

It's simple buyer beware. Duty of care is dependent upon client sophistication - a sophisticated client agreeing to a sophisticated comp arrangement, is expected to know the risks. The client remains responsible for his/her continuing actions, whether he/she likes it or not. If they lose money (return or principal) because of their own inaction - they wear it.

 

 

SD

 

 

[RadMan24]

I do not understand this line of thinking that "it's your fault if you don't pull your money when the HF manager is on top".

 

So you believe that LTCM or other firms who made lots of money while taking (and hiding) enormous risk, whom collected big fees and then blew up their clients money, are not at fault? It's simply the investor's job to know when to leave?

 

This is serious sophistry. The big returns and the big blowup are both functions of the same strategy!

 

What most people dont seem to understand, even when dealing with managers with integrity and who take seriously their fiduciary duties; you are buying a product/service...nothing more, nothing less. Results are hardly guaranteed, and these people are running a business. Discussing anything outside of this is a waste of time.

 

So you are kind of right...it isn't really the investors fault for knowing when to pull the money, but it is their responsibility to understand what they are putting their money in to.

 

Well said, Gregmal.

[coc]

I do not understand this line of thinking that "it's your fault if you don't pull your money when the HF manager is on top".

 

So you believe that LTCM or other firms who made lots of money while taking (and hiding) enormous risk, whom collected big fees and then blew up their clients money, are not at fault? It's simply the investor's job to know when to leave?

 

This is serious sophistry. The big returns and the big blowup are both functions of the same strategy!

 

What most people dont seem to understand, even when dealing with managers with integrity and who take seriously their fiduciary duties; you are buying a product/service...nothing more, nothing less. Results are hardly guaranteed, and these people are running a business. Discussing anything outside of this is a waste of time.

 

So you are kind of right...it isn't really the investors fault for knowing when to pull the money, but it is their responsibility to understand what they are putting their money in to.

 

Agreed. But this only works when the client has a clear idea of what he or she is getting. Thus why I am highlighting what the "product" has actually delivered to the client versus what it has delivered to the manager, minus the spin.

[stahleyp]

I do not understand this line of thinking that "it's your fault if you don't pull your money when the HF manager is on top".

 

So you believe that LTCM or other firms who made lots of money while taking (and hiding) enormous risk, whom collected big fees and then blew up their clients money, are not at fault? It's simply the investor's job to know when to leave?

 

This is serious sophistry. The big returns and the big blowup are both functions of the same strategy!

 

What most people dont seem to understand, even when dealing with managers with integrity and who take seriously their fiduciary duties; you are buying a product/service...nothing more, nothing less. Results are hardly guaranteed, and these people are running a business. Discussing anything outside of this is a waste of time.

 

So you are kind of right...it isn't really the investors fault for knowing when to pull the money, but it is their responsibility to understand what they are putting their money in to.

 

Well said, Gregmal.

 

You are buying a product that outperforms the market. If the product doesn't outperform, why should the manager make a ton of money? If I buy another product that fails I can usually return it or the company will eat the cost.

[SharperDingaan]

I do not understand this line of thinking that "it's your fault if you don't pull your money when the HF manager is on top".

 

So you believe that LTCM or other firms who made lots of money while taking (and hiding) enormous risk, whom collected big fees and then blew up their clients money, are not at fault? It's simply the investor's job to know when to leave?

 

This is serious sophistry. The big returns and the big blowup are both functions of the same strategy!

 

What most people dont seem to understand, even when dealing with managers with integrity and who take seriously their fiduciary duties; you are buying a product/service...nothing more, nothing less. Results are hardly guaranteed, and these people are running a business. Discussing anything outside of this is a waste of time.

 

So you are kind of right...it isn't really the investors fault for knowing when to pull the money, but it is their responsibility to understand what they are putting their money in to.

 

Well said, Gregmal.

 

You are buying a product that outperforms the market. If the product doesn't outperform, why should the manager make a ton of money? If I buy another product that fails I can usually return it or the company will eat the cost.

 

Invert this - why should the manager not just fire you?

You're just not worth the effort (cost > benefit) - and there are plenty of other $ in the sea!

Business is business.

 

SD

 

 

[stahleyp]

I do not understand this line of thinking that "it's your fault if you don't pull your money when the HF manager is on top".

 

So you believe that LTCM or other firms who made lots of money while taking (and hiding) enormous risk, whom collected big fees and then blew up their clients money, are not at fault? It's simply the investor's job to know when to leave?

 

This is serious sophistry. The big returns and the big blowup are both functions of the same strategy!

 

What most people dont seem to understand, even when dealing with managers with integrity and who take seriously their fiduciary duties; you are buying a product/service...nothing more, nothing less. Results are hardly guaranteed, and these people are running a business. Discussing anything outside of this is a waste of time.

 

So you are kind of right...it isn't really the investors fault for knowing when to pull the money, but it is their responsibility to understand what they are putting their money in to.

 

Well said, Gregmal.

 

You are buying a product that outperforms the market. If the product doesn't outperform, why should the manager make a ton of money? If I buy another product that fails I can usually return it or the company will eat the cost.

 

Invert this - why should the manager not just fire you?

You're just not worth the effort (cost > benefit) - and there are plenty of other $ in the sea!

Business is business.

 

SD

 

Yes, there is another fool, I suppose. That's why it should be the standard. I see no reason why an honest, capable manager wouldn't be okay with a 3 year clawback.

 

 

[RadMan24]

I do not understand this line of thinking that "it's your fault if you don't pull your money when the HF manager is on top".

 

So you believe that LTCM or other firms who made lots of money while taking (and hiding) enormous risk, whom collected big fees and then blew up their clients money, are not at fault? It's simply the investor's job to know when to leave?

 

This is serious sophistry. The big returns and the big blowup are both functions of the same strategy!

 

What most people dont seem to understand, even when dealing with managers with integrity and who take seriously their fiduciary duties; you are buying a product/service...nothing more, nothing less. Results are hardly guaranteed, and these people are running a business. Discussing anything outside of this is a waste of time.

 

So you are kind of right...it isn't really the investors fault for knowing when to pull the money, but it is their responsibility to understand what they are putting their money in to.

 

Well said, Gregmal.

 

You are buying a product that outperforms the market. If the product doesn't outperform, why should the manager make a ton of money? If I buy another product that fails I can usually return it or the company will eat the cost.

 

Invert this - why should the manager not just fire you?

You're just not worth the effort (cost > benefit) - and there are plenty of other $ in the sea!

Business is business.

 

SD

 

Yes, there is another fool, I suppose. That's why it should be the standard. I see no reason why an honest, capable manager wouldn't be okay with a 3 year clawback.

 

How is that any better than a manager having their own funds and earned fees reinvested in the account? So you get your money back if the fund falters? If people are that worried about investment loss, there's a risk-free option called treasuries. A honest and capable HF manager with 90+% of their wealth in the HF itself is far superior than a clawback which would disincentivize reinvestment in the fund, as HF performance fees are held in a trust account on a rolling three year basis.

[stahleyp]

I do not understand this line of thinking that "it's your fault if you don't pull your money when the HF manager is on top".

 

So you believe that LTCM or other firms who made lots of money while taking (and hiding) enormous risk, whom collected big fees and then blew up their clients money, are not at fault? It's simply the investor's job to know when to leave?

 

This is serious sophistry. The big returns and the big blowup are both functions of the same strategy!

 

What most people dont seem to understand, even when dealing with managers with integrity and who take seriously their fiduciary duties; you are buying a product/service...nothing more, nothing less. Results are hardly guaranteed, and these people are running a business. Discussing anything outside of this is a waste of time.

 

So you are kind of right...it isn't really the investors fault for knowing when to pull the money, but it is their responsibility to understand what they are putting their money in to.

 

Well said, Gregmal.

 

You are buying a product that outperforms the market. If the product doesn't outperform, why should the manager make a ton of money? If I buy another product that fails I can usually return it or the company will eat the cost.

 

Invert this - why should the manager not just fire you?

You're just not worth the effort (cost > benefit) - and there are plenty of other $ in the sea!

Business is business.

 

SD

 

Yes, there is another fool, I suppose. That's why it should be the standard. I see no reason why an honest, capable manager wouldn't be okay with a 3 year clawback.

 

How is that any better than a manager having their own funds and earned fees reinvested in the account? So you get your money back if the fund falters? If people are that worried about investment loss, there's a risk-free option called treasuries. A honest and capable HF manager with 90+% of their wealth in the HF itself is far superior than a clawback which would disincentivize reinvestment in the fund, as HF performance fees are held in a trust account on a rolling three year basis.

 

You would get your money back off fees paid - not investment loss.

 

How about a manager with 90%+ of wealth in the fund and clawback?

 

If the manager is so wealthy, why would it be hard to pay back clients for fees after sucking? You would think it is a moral obligation. The client paid for outperformance, the manager didn't do it, so why take their money?

 

 

[Gregmal]

Has anyone ever thought about why real estate agents dont give back their commission if you cant sell your house at a profit?

 

Granted, most HF guys are well off beyond any reasonable doubt, but the business principle of getting refunds only applies to products you are buying that are guaranteed or insured to work. Need a new set of spark plugs on your car? Sure, the new ones dont work you get a refund or another set of plugs. Need a new lightbulb, sure if theres no light you get your money back. If you can find an investment manager who guarantees you a specific return, I'd be cautious, but in that case you may be barking up the right tree. But I dont think you're going to find any manager or product that grants you that. Like any other service, when you no longer feel you are getting what you pay for, you are free to stop using it. No different than when you finish binging your HBO shows and no longer want to pay $15 a month while you wait 17 months for the next season....

 

Everyone is free to manage their own funds, and nowadays, pretty much everyone has access to free trading. If you meet the qualifications to do private/managed investments, you should be capable of understanding whats being offered, and confident enough in the jockey you are choosing to understand that things dont always work out as fast as you'd like(or at all) and that sometimes "shit happens", but that doesnt mean the dude fucked you, or did anything onerous.

 

Ive met a lot of really nice, intelligent mid 50s-early 60s fund managers, guys who even had articles written about them calling them the next so and so's and touting their investing acumen, who have been eaten alive by the last decade; some even going out of business. Thats the game. I mean, the Yankees aint getting their Jacoby Ellsbury money back.

[Gregmal]

I do not understand this line of thinking that "it's your fault if you don't pull your money when the HF manager is on top".

 

So you believe that LTCM or other firms who made lots of money while taking (and hiding) enormous risk, whom collected big fees and then blew up their clients money, are not at fault? It's simply the investor's job to know when to leave?

 

This is serious sophistry. The big returns and the big blowup are both functions of the same strategy!

 

What most people dont seem to understand, even when dealing with managers with integrity and who take seriously their fiduciary duties; you are buying a product/service...nothing more, nothing less. Results are hardly guaranteed, and these people are running a business. Discussing anything outside of this is a waste of time.

 

So you are kind of right...it isn't really the investors fault for knowing when to pull the money, but it is their responsibility to understand what they are putting their money in to.

 

Well said, Gregmal.

 

You are buying a product that outperforms the market. If the product doesn't outperform, why should the manager make a ton of money? If I buy another product that fails I can usually return it or the company will eat the cost.

 

Invert this - why should the manager not just fire you?

You're just not worth the effort (cost > benefit) - and there are plenty of other $ in the sea!

Business is business.

 

SD

 

Yes, there is another fool, I suppose. That's why it should be the standard. I see no reason why an honest, capable manager wouldn't be okay with a 3 year clawback.

 

How is that any better than a manager having their own funds and earned fees reinvested in the account? So you get your money back if the fund falters? If people are that worried about investment loss, there's a risk-free option called treasuries. A honest and capable HF manager with 90+% of their wealth in the HF itself is far superior than a clawback which would disincentivize reinvestment in the fund, as HF performance fees are held in a trust account on a rolling three year basis.

 

You would get your money back off fees paid - not investment loss.

 

How about a manager with 90%+ of wealth in the fund and clawback?

 

If the manager is so wealthy, why would it be hard to pay back clients for fees after sucking? You would think it is a moral obligation. The client paid for outperformance, the manager didn't do it, so why take their money?

 

In what OM or PPM is outperformance a guaranteed feature of any fund? The client paid for a manager that they believed would outperform. My neighbor bought a lottery ticket because he believed he had a shot at winning. Whats the difference?

[stahleyp]

Well, the person buying the lottery ticket doesn't really expect to win. The investor is expecting to outperform (speaking long only here). There is a huge difference.

 

I look at it as a faulty product. We buy products and expect them to perform for their intended purpose (ie what they're sold on). If a manager is selling a product based on superior market performance and doesn't fulfill that standard, it's a faulty product. So why should someone get paid for crappy performance? Because they worked hard?

 

The manager is paid well or extremely well either way. If a company, as you alluded to, makes a light bulb that fails quickly, they'll go out of business. However, the investment manager is selling hopes and dreams - all the while collecting 2% (plus a percentage of profits!).

 

You would think an honorable person might be like "I already have a ton of money...why am I charging my clients if they can get another product that performs better for free?"

 

I give a ton of props to Allan Mecham. The guy was managing $1+ billion. He was earning, I would imagine, $10 million a year - rain or shine. However, he closed it down rather than fleece his clients. That's honorable. Heck, I even find Pabrai somewhat honorable since he went like 10 years without earning anything (though I think Pabrai is a net negative for his clients).

 

On the opposite end of the spectrum you have people like Tilson. I was listening to an interview and he was talking about how he should have marketed the fund harder when he had his hot streak. Basically more people and more dollars would have suffered through his terrible performance than what had actually happened. So, the guy wishes he would have fleeced his clients more? I would think someone would feel bad about fleecing people than not...but I'm not a wealthy hedge fund manager.

 

Overall, I would have less of a problem if the compensation for some of these guys if it weren't so egregious. 

[5xEBITDA]

Fund managers are in the service industry - they provide investors with a service. This service being offered is access to products offering exposure to a certain asset class, investment strategy, or one-off opportunity. You are not buying guaranteed results, only exposure. An individual investing in investment funds should consider how the product fits into their own portfolio. A sophisticated investor will likely not allocate their entire net worth, nor a meaningful portion, to any single manager or strategy. You probably have a fund for fixed income, equities, and more opportunistic strategies to supplement a broader portfolio including real estate, cash, and other personal assets.

 

This is all to say, institutional investors are generally sophisticated individuals - or have hired an advisor - who understand how they're constructing their portfolio and the risks they are taking. Aside from being caught in a fraud, this generally works out to sometimes it works and sometimes it doesn't. People understand that going in. If you're unsatisfied with the results you simply redeem your money out and that's it.

 

So, I don't understand what the discussion is really all about. The idea that there should be some sort of clawback is ridiculous. Would you expect Netflix to pay you back 6 months subscription fee if you concluded you weren't satisfied with the service? Netflix doesn't guarantee anyone satisfaction with their content, but they try their best to provide a service they think people will like. I don't see how this is any different.

 

I agree that poor performance in a relatively vanilla, long-only equity fund should be highly criticized especially if the manager is charging above-market fees. Fortunately, the asset management industry itself is relatively efficient and fee compression is a long standing trend. Even vanilla long/short equity hedge funds are seeing management fees compressed below 1.5% and performance fees below 15%. I don't know a single, emerging domestic long/short equity manager who is having real success raising money with fees above that, even with solid performance. You can usually gain similar exposure via mutual funds offering alternative strategies. The fund flow data on this is pretty self explanatory.

 

Where the majority of fund flows are going, and where real fees are still being generated, are in alternative, illiquid asset classes such as private credit, infrastructure, and private equity.

 

I really don't believe there are many long-only or long/short equity funds out there that are still "fleecing" clients with above-market rates for below-market returns. The funds that people normally point to are either 1) entirely or mostly founder capital at this point, 2) have already renegotiated fees downward and are just not reported, or 3) have accepted they will never seriously raise new money and are just in the process of letting the funds roll off naturally and let anyone stay that still wants to go along for the ride. There are also funds out there still earning strong fees while "underperforming the S&P 500" despite the fund manager, and their LPs, all being perfectly fine with this given the fund mandate.

 

As it relates to Mohnish Prabrai and Guy Spier. My personal opinion, which I'm happy to debate or be corrected on, is that these individuals appear to target their self-marketing efforts not on raising assets, but on maintaining enough relevancy in the community to continue selling their books and remain included in value investing events like gatherings, podcasts, articles, and the like. You will never, ever, see these two at any real institutional investor event. I apologize if this is insulting, but these two simply aren't real money players which is why my "summary" of all of this is that neither are good indications for how the asset management industry is currently operating regarding fee structures, etc. 

[stahleyp]

Fund managers are in the service industry - they provide investors with a service. This service being offered is access to products offering exposure to a certain asset class, investment strategy, or one-off opportunity. You are not buying guaranteed results, only exposure. An individual investing in investment funds should consider how the product fits into their own portfolio. A sophisticated investor will likely not allocate their entire net worth, nor a meaningful portion, to any single manager or strategy. You probably have a fund for fixed income, equities, and more opportunistic strategies to supplement a broader portfolio including real estate, cash, and other personal assets.

 

This is all to say, institutional investors are generally sophisticated individuals - or have hired an advisor - who understand how they're constructing their portfolio and the risks they are taking. Aside from being caught in a fraud, this generally works out to sometimes it works and sometimes it doesn't. People understand that going in. If you're unsatisfied with the results you simply redeem your money out and that's it.

 

So, I don't understand what the discussion is really all about. The idea that there should be some sort of clawback is ridiculous. Would you expect Netflix to pay you back 6 months subscription fee if you concluded you weren't satisfied with the service? Netflix doesn't guarantee anyone satisfaction with their content, but they try their best to provide a service they think people will like. I don't see how this is any different.

 

I agree that poor performance in a relatively vanilla, long-only equity fund should be highly criticized especially if the manager is charging above-market fees. Fortunately, the asset management industry itself is relatively efficient and fee compression is a long standing trend. Even vanilla long/short equity hedge funds are seeing management fees compressed below 1.5% and performance fees below 15%. I don't know a single, emerging domestic long/short equity manager who is having real success raising money with fees above that, even with solid performance. You can usually gain similar exposure via mutual funds offering alternative strategies. The fund flow data on this is pretty self explanatory.

 

Where the majority of fund flows are going, and where real fees are still being generated, are in alternative, illiquid asset classes such as private credit, infrastructure, and private equity.

 

I really don't believe there are many long-only or long/short equity funds out there that are still "fleecing" clients with above-market rates for below-market returns. The funds that people normally point to are either 1) entirely or mostly founder capital at this point, 2) have already renegotiated fees downward and are just not reported, or 3) have accepted they will never seriously raise new money and are just in the process of letting the funds roll off naturally and let anyone stay that still wants to go along for the ride. There are also funds out there still earning strong fees while "underperforming the S&P 500" despite the fund manager, and their LPs, all being perfectly fine with this given the fund mandate.

 

As it relates to Mohnish Prabrai and Guy Spier. My personal opinion, which I'm happy to debate or be corrected on, is that these individuals appear to target their self-marketing efforts not on raising assets, but on maintaining enough relevancy in the community to continue selling their books and remain included in value investing events like gatherings, podcasts, articles, and the like. You will never, ever, see these two at any real institutional investor event. I apologize if this is insulting, but these two simply aren't real money players which is why my "summary" of all of this is that neither are good indications for how the asset management industry is currently operating regarding fee structures, etc.

 

If netflix sold that its goal was to provide more/better programming than Disney plus (say some agreed upon metric) and then failed to deliver that, then yes, a refund should be due.

[Gregmal]

Fund managers are in the service industry - they provide investors with a service. This service being offered is access to products offering exposure to a certain asset class, investment strategy, or one-off opportunity. You are not buying guaranteed results, only exposure. An individual investing in investment funds should consider how the product fits into their own portfolio. A sophisticated investor will likely not allocate their entire net worth, nor a meaningful portion, to any single manager or strategy. You probably have a fund for fixed income, equities, and more opportunistic strategies to supplement a broader portfolio including real estate, cash, and other personal assets.

 

This is all to say, institutional investors are generally sophisticated individuals - or have hired an advisor - who understand how they're constructing their portfolio and the risks they are taking. Aside from being caught in a fraud, this generally works out to sometimes it works and sometimes it doesn't. People understand that going in. If you're unsatisfied with the results you simply redeem your money out and that's it.

 

So, I don't understand what the discussion is really all about. The idea that there should be some sort of clawback is ridiculous. Would you expect Netflix to pay you back 6 months subscription fee if you concluded you weren't satisfied with the service? Netflix doesn't guarantee anyone satisfaction with their content, but they try their best to provide a service they think people will like. I don't see how this is any different.

 

I agree that poor performance in a relatively vanilla, long-only equity fund should be highly criticized especially if the manager is charging above-market fees. Fortunately, the asset management industry itself is relatively efficient and fee compression is a long standing trend. Even vanilla long/short equity hedge funds are seeing management fees compressed below 1.5% and performance fees below 15%. I don't know a single, emerging domestic long/short equity manager who is having real success raising money with fees above that, even with solid performance. You can usually gain similar exposure via mutual funds offering alternative strategies. The fund flow data on this is pretty self explanatory.

 

Where the majority of fund flows are going, and where real fees are still being generated, are in alternative, illiquid asset classes such as private credit, infrastructure, and private equity.

 

I really don't believe there are many long-only or long/short equity funds out there that are still "fleecing" clients with above-market rates for below-market returns. The funds that people normally point to are either 1) entirely or mostly founder capital at this point, 2) have already renegotiated fees downward and are just not reported, or 3) have accepted they will never seriously raise new money and are just in the process of letting the funds roll off naturally and let anyone stay that still wants to go along for the ride. There are also funds out there still earning strong fees while "underperforming the S&P 500" despite the fund manager, and their LPs, all being perfectly fine with this given the fund mandate.

 

As it relates to Mohnish Prabrai and Guy Spier. My personal opinion, which I'm happy to debate or be corrected on, is that these individuals appear to target their self-marketing efforts not on raising assets, but on maintaining enough relevancy in the community to continue selling their books and remain included in value investing events like gatherings, podcasts, articles, and the like. You will never, ever, see these two at any real institutional investor event. I apologize if this is insulting, but these two simply aren't real money players which is why my "summary" of all of this is that neither are good indications for how the asset management industry is currently operating regarding fee structures, etc.

 

If netflix sold that its goal was to provide more/better programming than Disney plus (say some agreed upon metric) and then failed to deliver that, then yes, a refund should be due.

 

Whats sold is stated in the PPM. And while Ive seen a bunch(they are fairly boilerplate) Ive never seen that claim made. A goal is an aspiration. Not a guarantee.

[stahleyp]

Fund managers are in the service industry - they provide investors with a service. This service being offered is access to products offering exposure to a certain asset class, investment strategy, or one-off opportunity. You are not buying guaranteed results, only exposure. An individual investing in investment funds should consider how the product fits into their own portfolio. A sophisticated investor will likely not allocate their entire net worth, nor a meaningful portion, to any single manager or strategy. You probably have a fund for fixed income, equities, and more opportunistic strategies to supplement a broader portfolio including real estate, cash, and other personal assets.

 

This is all to say, institutional investors are generally sophisticated individuals - or have hired an advisor - who understand how they're constructing their portfolio and the risks they are taking. Aside from being caught in a fraud, this generally works out to sometimes it works and sometimes it doesn't. People understand that going in. If you're unsatisfied with the results you simply redeem your money out and that's it.

 

So, I don't understand what the discussion is really all about. The idea that there should be some sort of clawback is ridiculous. Would you expect Netflix to pay you back 6 months subscription fee if you concluded you weren't satisfied with the service? Netflix doesn't guarantee anyone satisfaction with their content, but they try their best to provide a service they think people will like. I don't see how this is any different.

 

I agree that poor performance in a relatively vanilla, long-only equity fund should be highly criticized especially if the manager is charging above-market fees. Fortunately, the asset management industry itself is relatively efficient and fee compression is a long standing trend. Even vanilla long/short equity hedge funds are seeing management fees compressed below 1.5% and performance fees below 15%. I don't know a single, emerging domestic long/short equity manager who is having real success raising money with fees above that, even with solid performance. You can usually gain similar exposure via mutual funds offering alternative strategies. The fund flow data on this is pretty self explanatory.

 

Where the majority of fund flows are going, and where real fees are still being generated, are in alternative, illiquid asset classes such as private credit, infrastructure, and private equity.

 

I really don't believe there are many long-only or long/short equity funds out there that are still "fleecing" clients with above-market rates for below-market returns. The funds that people normally point to are either 1) entirely or mostly founder capital at this point, 2) have already renegotiated fees downward and are just not reported, or 3) have accepted they will never seriously raise new money and are just in the process of letting the funds roll off naturally and let anyone stay that still wants to go along for the ride. There are also funds out there still earning strong fees while "underperforming the S&P 500" despite the fund manager, and their LPs, all being perfectly fine with this given the fund mandate.

 

As it relates to Mohnish Prabrai and Guy Spier. My personal opinion, which I'm happy to debate or be corrected on, is that these individuals appear to target their self-marketing efforts not on raising assets, but on maintaining enough relevancy in the community to continue selling their books and remain included in value investing events like gatherings, podcasts, articles, and the like. You will never, ever, see these two at any real institutional investor event. I apologize if this is insulting, but these two simply aren't real money players which is why my "summary" of all of this is that neither are good indications for how the asset management industry is currently operating regarding fee structures, etc.

 

If netflix sold that its goal was to provide more/better programming than Disney plus (say some agreed upon metric) and then failed to deliver that, then yes, a refund should be due.

 

Whats sold is stated in the PPM. And while Ive seen a bunch(they are fairly boilerplate) Ive never seen that claim made. A goal is an aspiration. Not a guarantee.

 

Well that might be technically accurate. But people buy on emotion and expectations. People assume that if the "goal" is to outperform then that's what they'll get...otherwise they wouldn't invest in the first place. However, after the period is over, the fees are gone but the client still has less money than if put in an index fund.

 

If people want to make a ton of money, they should also be okay if it doesn't work out and they make very little (or no) money. It's basically a guaranteed lottery winner as long as you're good at selling. Though, they only may only get to be wealthy than obscenely wealthy if performance sucks but still a great deal for the manager.

 

Pabrai leads people to believe that he's compounded at 26%. Very misleading.

[coc]

You guys are completely misunderstanding the discussion, which started with the claim "They don't charge a management fee, so you only pay for performance" early in the thread.

 

That is a bogus statement which hedge fund managers would love you to believe. It isn't true, and I have shown why.  The Netflix analogy is very, very wrong.  With a hedge fund you may pay for a product (above average returns) that you might have to give back, but you don't get a refund.

 

The closer (but still wrong) analogy is you pay Netflix five years in advance, then after year two they cut you off from the service without giving you any money back. You're out the money and the product. This remains wrong because unlike Netflix, a hedge fund manager can both keep your fees and give you a negative product over time. Again, not a criticism - this is how risk taking works.

 

It's just that simple. No one should ever enter in the arrangement unless they understand that this is a possible outcome.

 

I'm not interested in debating it any more - if you want to pay someone 10-20% of your capital, end up with below market returns, and rationalize it, I guess it's your money. But for anyone with money to invest who thinks "I'll only pay fees if I get great performance over time" - I am writing to you.

 

For the record, I don't expect clawbacks to ever enter the picture.

[Spekulatius]

Fund managers are in the service industry - they provide investors with a service. This service being offered is access to products offering exposure to a certain asset class, investment strategy, or one-off opportunity. You are not buying guaranteed results, only exposure. An individual investing in investment funds should consider how the product fits into their own portfolio. A sophisticated investor will likely not allocate their entire net worth, nor a meaningful portion, to any single manager or strategy. You probably have a fund for fixed income, equities, and more opportunistic strategies to supplement a broader portfolio including real estate, cash, and other personal assets.

 

This is all to say, institutional investors are generally sophisticated individuals - or have hired an advisor - who understand how they're constructing their portfolio and the risks they are taking. Aside from being caught in a fraud, this generally works out to sometimes it works and sometimes it doesn't. People understand that going in. If you're unsatisfied with the results you simply redeem your money out and that's it.

 

So, I don't understand what the discussion is really all about. The idea that there should be some sort of clawback is ridiculous. Would you expect Netflix to pay you back 6 months subscription fee if you concluded you weren't satisfied with the service? Netflix doesn't guarantee anyone satisfaction with their content, but they try their best to provide a service they think people will like. I don't see how this is any different.

 

I agree that poor performance in a relatively vanilla, long-only equity fund should be highly criticized especially if the manager is charging above-market fees. Fortunately, the asset management industry itself is relatively efficient and fee compression is a long standing trend. Even vanilla long/short equity hedge funds are seeing management fees compressed below 1.5% and performance fees below 15%. I don't know a single, emerging domestic long/short equity manager who is having real success raising money with fees above that, even with solid performance. You can usually gain similar exposure via mutual funds offering alternative strategies. The fund flow data on this is pretty self explanatory.

 

Where the majority of fund flows are going, and where real fees are still being generated, are in alternative, illiquid asset classes such as private credit, infrastructure, and private equity.

 

I really don't believe there are many long-only or long/short equity funds out there that are still "fleecing" clients with above-market rates for below-market returns. The funds that people normally point to are either 1) entirely or mostly founder capital at this point, 2) have already renegotiated fees downward and are just not reported, or 3) have accepted they will never seriously raise new money and are just in the process of letting the funds roll off naturally and let anyone stay that still wants to go along for the ride. There are also funds out there still earning strong fees while "underperforming the S&P 500" despite the fund manager, and their LPs, all being perfectly fine with this given the fund mandate.

 

As it relates to Mohnish Prabrai and Guy Spier. My personal opinion, which I'm happy to debate or be corrected on, is that these individuals appear to target their self-marketing efforts not on raising assets, but on maintaining enough relevancy in the community to continue selling their books and remain included in value investing events like gatherings, podcasts, articles, and the like. You will never, ever, see these two at any real institutional investor event. I apologize if this is insulting, but these two simply aren't real money players which is why my "summary" of all of this is that neither are good indications for how the asset management industry is currently operating regarding fee structures, etc.

 

+1. I think this post pretty much addressed everything.

[stahleyp]

I suppose I like the clawback because it dramatically decreases the pay for those who are merely talented salesman than talented investors. I think it's crazy that people are so well compensated for a skill that they're not actually good at doing (investing).