Hedge Funds Are Pocketing Much of Their Clients' Gains with 'No Limit' Fees

https://www.bloomberg.com/graphics/2025-hedge-fund-investment-fees/

by wslh • 1 year ago

160 122 1 year ago

bloomberg.com

asdasdsddd2• 1 year ago

1. Crazy graph format lol

2. I thought management fees were supposed to pay for comp?

3. Buying SPY wins again?

4. I don't really care about rich people getting ripped off, but I wonder if any of my money leaks into these funds

frenchtoast8• 1 year ago

Does this graph format have a name? Google isn’t turning up anything for me.

Terr_2• 1 year ago

Resembles an unhelpfully simple

https://www.amcharts.com/voronoi-treemap/

bberenberg• 1 year ago

I think you need to consider time horizons when analyzing these funds. You can buy SPY and it will win. Unless there is a market crash when you hit retirement age, in which case you are screwed until the market recovers. If you don't mind the risk, go 2x levered and you will do even better. [0]

Many institutions and HNW and UHNW individuals prioritize consistency over absolute growth. They would rather make 6-8% a year and reduce downside risk than optimize for gains. Multi-strat funds like this one are catering to people who want that product.

[0] https://citeseerx.ist.psu.edu/document?repid=rep1&type=pdf&d...

mgfist2• 1 year ago

2x leaves at the mercy of margin calls, which inconveniently come at the moment where you least want to sell (right after a huge crash). Getting margin called after a 50% crashes leaves you with $0, as an example.

A 50% market crash would be brutal even without leverage, but at least no one would force you to sell.

chongli• 1 year ago

You have to pay interest when you invest on margin and a margin call can wipe you out. Investing on margin is serious riverboat gambling, not retirement saving.

asdasdsddd2• 1 year ago

I always see this "excuse". Our fund isn't focused on alpha; we minimize beta. It's just unclear to me whether this is shown out in the data.

fallingknife2• 1 year ago

I've seen plenty of attempts at cramming down multidimensional data into less dimensions, but this is the first time I've ever seen the opposite!

barbarr• 1 year ago

Ok so in defense of their voronoi graphs, if they used a segmented bar or pie chart instead, you wouldn't be able to see the small quantities clearly, and if they used circles of different sizes, it would be easy to mistake the radii as the measured quantity instead of the area. Similar issue arises with lengths/widths if you use rectangles. Their visualization nudges you to compare areas which is a good feature imo.

airstrike• 1 year ago

Just put regular columns next to each other.

fn-mote• 1 year ago

it would be easy to mistake the radii as the measured quantity instead of the area

Humans perceive the area as the measured quantity even when radius is the intended, so this isn’t going to be a problem.

thaumasiotes• 1 year ago

and if they used circles of different sizes, it would be easy to mistake the radii as the measured quantity instead of the area

No, if the measured quantity is represented as the radius, everyone will assume it's the area, and you've designed a very bad graph. If the measured quantity is represented as the area, everyone will assume it's the area, and you're fine. The area is what you can see.

IncreasePosts• 1 year ago

Hedge funds aren't necessarily about getting max gains - they can be about decorrelating some of your investments (hence the hedge). So maybe buying SPY would have worked , but people with their money in hedge funds probably already have a bunch of investments correlated with SPY.

Terr_2• 1 year ago

they can be about decorrelating some of your investments (hence the hedge).

As a tangential caution to readers: Remember that where you work is something you want to diversify for: Put a bit more into things that won't go bust around the same times you lose your job.

clove• 1 year ago

That's no longer true and hasn't been for a long time. While the name comes from that concept, the "hedge fund" is now just any fund marketed to accredited investors.

anotherhue• 1 year ago

Surely there isn't a shortage of competition? Does everyone just want in on the big names?

tmpz22• 1 year ago

Old people who don't watch their assets, very rich people who don't watch their assets. Maybe we should build a protection mechanism for it - maybe call it the Consumer Finance Protection Bureau?

metadat• 1 year ago

For reference, see:

DOGE-Backed Halt at CFPB Comes Amid Musk's Plans for 'X' Digital Wallet - https://news.ycombinator.com/item?id=43003636

And

The biggest microcode attack in our history is underway - https://news.ycombinator.com/item?id=43001730

wslh• 1 year ago

Automated protection tools could also help in monitoring hedge funds, similar to how apps like BillGuard[1] worked for personal finance. Many investors don’t actively track their holdings the way they do with credit cards.

[1] https://en.wikipedia.org/wiki/BillGuard

fallingknife2• 1 year ago

Most investors who invest in these funds are institutions and the ones who are (extremely rich) individuals are very unlikely to not be paying attention.

JumpCrisscross9• 1 year ago

CFPB is irrelevant for hedge fund LPs.

readthenotes1• 1 year ago

Yes and what would be its job? Making sure that rich people have lawyers who read contracts? That would probably suffice. I don't have much sympathy for people who have enough money to use hedge funds and complain about the terms of their completely voluntary transaction.

mhh__2• 1 year ago

The top hedge funds that can realistically promise [0] excellent returns are basically all capacity constrained AFAICT

Either that or they've switched business model to mostly making money on the management fee. It's easier to grow the assets than the returns.

[0] If you can get money into one of the top multi-managers, in peacetime you are basically looking at somewhere between a nice and very good return every year. Where peacetime could well include a big bear market in stocks e.g. Millennium made 35% in 2022 despite a big draw down in the SP500.

This of course isn't magic, illiquidity, big spikes in (say) funding costs, or just foolishness can still kill them.

roncesvalles• 1 year ago

It's easier to grow the assets than the returns.

A certain famous Italian gentleman had the same realization.

JKCalhoun• 1 year ago

Yeah, I'm not sure who is being scammed. Myself, I have never heard of any of these — Citadel, etc.

JumpCrisscross9• 1 year ago

Does everyone just want in on the big names?

Yes. Generating consistent returns is hard. Proving you can do it is harder. Investors may be rationally willing to cede most of the upside in exchange for less exposure to the downside. (Part of the problem is the political pressure on public fund managers to avoid losses.)

Terretta2• 1 year ago

Investing edge comes from hard work.

These are not single strategy hedge funds. The places mentioned are doing something different not inexpensively duplicated, that returns a different investment profile.

Random Google: https://www.eatonvance.com/insights/articles/how-multi-manag...

yieldcrv5• 1 year ago

I agree that's a problem to be discerning about - and it may be impossible to be discerning about - I also think people are looking for any reason to just "index" and purchase the S&P 500 or VOO ETFs

like A) from being ineligible to be in hedge funds, and then B) to justify their fear

but hedge fund returns are not able to really be aggregated so simply, there have been attempts, I can pull up whatever article you're probably thinking about, but in real life if you join a hedge fund, you aren't joining a portfolio, your capital is applied to new positions.

so every subscription to a hedge fund has unique performance. only people that joined at the exact same time with the same amount of capital have a chance of having the same experience.

I think that reality muddies most of the discussion about the concept of hedge funds and investor returns.

You should definitely look for the strategy you like, followed by liking the people running the fund.

ddmitriev2• 1 year ago

This does not sound right. Maybe venture capital funds work this way? (I wouldn't know about them.)

But with regular hedge funds, you are joining a portfolio and you do get the return even on the positions that were in place at the time you invested. The only differences between investors that may affect the return that is allocated to them are a) their share classes, which may affect investment terms such as fees or withdrawal rights, and b) their respective high watermarks, which may affect the payment of performance fees. Everything else within the same fund will be the same.

yieldcrv5• 1 year ago

Sidepockets throw that difference off

mjfl8• 1 year ago

As someone who has worked in the industry: hedge funds are certainly parasites on our society, who make money not from wealthy clients (as is widely thought) but by managing government money through the social security system, union pension funds, college endowments, and sovereign wealth funds. They are a tool to redistribute billions of dollars of ordinary people's money into the pockets of an 'in-group' that then uses the money to buy political influence. I've watched this happen with my own eyes.

namuol• 1 year ago

Any advice to reform things? As individuals or as a collective?

mjfl8• 1 year ago

(1) widespread education and awareness of this phenomenon, (2) put in restrictions on large institutions i.e. the government, unions, universities so that they only invest in funds with 'low-fee' structures and hire professional risk management at the institution-level that hedge risks using more standard methods like mixing bonds and equities and cash. Ban large institutions from investing in private equity, which is a high fee structure built to hide losses over long term periods.

psytrancefan• 1 year ago

How about mind your own business?

The main problem to me is everyone wants to tell everyone else what to do "for the good of society" but over my lifetime this has been a slow acting cultural poison.

Less than 20 years ago it cost me $7 a trade for one side and that was the cheap revolutionary price for the retail investor. Today it cost me ZERO. That is because of hedge funds. I doubt this will last forever because someone will come along and "fix" what is not broken "for the good of society".

bko2• 1 year ago

by managing government money through the social security system, union pension funds, college endowments, and sovereign wealth funds

Why don't you target that anger and contempt to the organizations willfully giving money to these organizations?

"Social security system is a parasite on society, who steals taxpayers money and throws it away in inefficient vehicles evidence over decades that tells us that their investments aren't outperfoming index funds"

JumpCrisscross9• 1 year ago

Why don't you target that anger and contempt to the organizations willfully giving money to these organizations?

This happens from time to time. Most recently, in pensions withdrawing from private equity. It’s historically come to bite when these managers hit a bout of volatility. Put simply, portfolio theory is incredibly robust.

The question isn’t why hedge funds, but why does it keep paying so well?

ldjkfkdsjnv• 1 year ago

Yeah places like PIMCO are basically stealing from pension funds through a bunch of complicated financial engineering. Some of the assets they trade arent liquid, theres no consensus on fair price. And so a bunch of funny business goes on

bormaj• 1 year ago

As someone else in the industry, is it fair to categorize all HFs this way?

mjfl8• 1 year ago

funds with high 'skin in the game' as in high amounts of manager net worth in the fund, tend to be an exception to what I'm saying.

jldugger• 1 year ago

Wait, which part of the social security system is investing in hedge funds?

stackskipton• 1 year ago

US Social Security doesn't. Other countries may like Norway: https://en.wikipedia.org/wiki/Government_Pension_Fund_of_Nor...

JumpCrisscross9• 1 year ago

managing government money through the social security system

Do you mean the social safety net? Social security does not invest in hedge funds.

ceejayoz• 1 year ago

Well, not yet.

barumrho2• 1 year ago

You are right about Social Security. It only holds Treasuries. But, there are many other pension funds like teachers pension, government workers pensions, etc that manage working class money.

energy123• 1 year ago

Why are you singling out hedge funds? The blame lies equally with all active fund management, as well as the investment managers (e.g. pension funds) who decide to allocate to them instead of to a passive tracker.

JumpCrisscross9• 1 year ago

blame lies equally with all active fund management, as well as the investment managers (e.g. pension funds) who decide to allocate to them instead of to a passive tracker

Except active management works for any metric other than long-term yield maximisation. (Most institutions have short-term needs, whether for liquidity or optics.)

SideQuark4• 1 year ago

Hedge funds don’t magically take your money any more than Santa Claus takes your money.

Pretty much none of your claims are true, unless those actors desire to be in a hedge fund (same as any place to invest). For example, social security is prevented by law from investing in anything except specially crafted Treasury bonds. Sovereign wealth funds are not “ordinary people’s money.” Union pensions are controlled by unions, and if they’re wise, are spread over many options. Same for college endowments.

It’s not hard to look up the sizes of these various asset categories and see your claims are mathematically impossible. I believe arithmetic over your eyes.

Don’t want one, invest elsewhere.

mjfl8• 1 year ago

I was wrong about the social security system, which I must have gotten confused with some kind of pension system, like CALPERs, which used to invest in hedge funds before pulling out in 2014, but still allocates 40% of its portfolio into private equity [1], which may be worse than hedge funds for reasons I have discussed elsewhere. Everything else I said was true.

Don’t want one, invest elsewhere.

Ordinary people have little control over what their pension funds invest in, and typically are not informed on these issues.

[1] https://raoglobal.org/insights/calpers-goes-big-on-private-e...

yieldcrv5• 1 year ago

I’ve been satisfied with the hedge fund I was in

They didn't just do common stock equity trades, they sliced and diced money flows into and out of companies so interestingly

It felt like I had employed people to find, and create, deal flow

In bear markets theyd find companies that VCs all passed over, and created a pivot for them and extremely favorable capital terms to the hedge fund such as revenue splits before it hits the company’s books

When people say parasites, I see transactions that would never have happened

I see transactions I would never be able to get into the room to negotiate to happens

I also see how nobody knows anything. People see hedge fund movements in equity positions, but they wont see revenue splits, inventory splits for the fund to sell themselves

Its all about what you/your fund specifically does

neilv• 1 year ago

It's nice to see that hedge funds are still around. I thought all the bros had switched to tech.

tombert8• 1 year ago

I've tried for the last several years to go the other direction: tech -> finance. I've sent thousands of applications to hundreds of trading and finance companies, and gotten zero bites in the last two years.

I am currently just assuming that there aren't as many finance jobs as there are jobs at big tech.

mhh__2• 1 year ago

There aren't.

edm0nd• 1 year ago

You probably gotta have some wild AI and Quant skills on your resume to get any sort of response.

moron4hire• 1 year ago

I'm just assuming nobody is actually responding to job applications in any industry anymore.

RhysU• 1 year ago

Find a recruiter.

anitil• 1 year ago

I have found (in other areas - supply chain, hardware, mech eng, finance) that it's much easier for people to move from <field> in to tech than the other way around. I'm not sure if that's because other fields require proof of capability (like a bachelors) whereas tech seems more welcoming to someone from other backgrounds.

pkkkzip• 1 year ago

You just aren't as special or interesting as you think to them. Think about this, there are many finance focused graduates with several years of experience in that industry (buy-side im presuming from your comment) and being able to code isn't as special as SWE think it is.

This is another case of software devs thinking they can crack finance/trading because they know how to code. The myopia comes from the difference in culture and how risk is treated from tech organizations to finance.

Exception is if you have an advanced math/physics degree that will be useful in the domain of quant shops but I wouldn't recommend someone taking that route just because they want to make money.

There are lot of finance/trading jobs. I wouldn't waste time pursuing that field. Very few end up parachuting with a mid six digit figure salary even inside that industry and these are people with many years of finance specific experience.

yieldcrv5• 1 year ago

They are more pedigree focused

But cold applying isn't in vogue anyway

fakedang• 1 year ago

I co-run a quant-driven prop shop. We never did and still don't do inbound recruiting, only outbound and referrals. It's the same with almost all quant shops now in the EU. I guess the US would be different, but only slightly - I guess every small quant shop does the same across geographies.

Also there are only a handful of big quant shops or hedgefunds actively seeking heavyweight quant guys.

The industry in general has moved to a strategy of doing more with less.

Terretta2• 1 year ago

We are in NYC area. More in profile.

blackeyeblitzar• 1 year ago

Aren’t hedge funds also tech companies these days? For example, isn’t the parent company of deep seek a hedge fund?

barumrho2• 1 year ago

Shouldn't this problem self-regulate, though? Ultimately, investors mainly care about the returns and if you can get better returns elsewhere due to these fees, they will switch.

If they can charge large amount of fees and still stay competitive, then good on them, right?

financetechbro2• 1 year ago

Perhaps. But HF capital is usually locked down for a few years. So there is some friction to switching

ptero• 1 year ago

True, but I believe (although last explored this question a long time ago) that the majority of the capital is not locked.

jfengel2• 1 year ago

There's a lot of friction. You won't switch based on one year, which would just leave you chasing last year's lucky winner (who will likely revert to the median next year). It takes a long time to realize that your hedge fund is a loser.

The whole point of a hedge fund is for you to let someone else do the worrying. So the market is decidedly inefficient.

chii2• 1 year ago

It takes a long time to realize that your hedge fund is a loser.

it's been many decades since the existence of statistical analysis of hedge funds (as an aggregate) that demonstrates their lack of edge over benchmark passive index funds.

Some hedge funds would still out-perform. Most don't, and those who do tend to charge fees up to their level of edge, and leave only index-benchmark returns for their investors.

If you don't heed this evidence now, you deserve to lose money to these funds.

comboy• 1 year ago

It's kind of like buying lottery tickets from a vendor and when you win, but he steals the winnings, you switch to another one.

Except, also, you don't actually ever see the tickets.

bushbaba• 1 year ago

Depends on if there’s capital gains tax when leaving the firm.

k-i-r-t-h-i• 1 year ago

Ultimately, investors mainly care about the returns

Not quite. It also matters how and when returns are generated. Some vol funds make 1–3% a year on average, but they still manage billions because when markets crash, they (presumably) crush it — and that’s when investors need them the most

thrill• 1 year ago

Hedge funds are entirely voluntary transactions on the part of participants.

chris_va2• 1 year ago

Doesn't mean said participants can't get together and complain about it to try and improve market liquidity

usefulcat• 1 year ago

How is market liquidity relevant here?

calmbonsai• 1 year ago

Slow news day Bloomberg? Seriously, if you're investing in ANYTHING, and don't understand the prospectus or won't hire people to understand it for you, you're a fool.

They can charge whatever they want on these "pass-throughs".

The industry, just like post-return-management-clawbacks in the Tiger era (see Mallaby's "More Money Than God" https://amzn.com/dp/B003SNJZ3Y ) can get away with this precisely ONCE before "normalization" (as much as it's ever normalized) kicks in and these practices obviated.

randomcarbloke• 1 year ago

whatever happened to 2 and 20?

monkeydust• 1 year ago

I think a few years ago it was all about longer lock-ins, now pass-throughs ...i mean come on its about as close to a setup as you can get!

JamesVU2000• 1 year ago

Hedges only make sense if the cure is not worse than the disease. Portfolios are littered with bad hedges

Hedge Funds Are Pocketing Much of Their Clients' Gains with 'No Limit' Fees

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