Fund fee question

[mhdousa]

Hi all -

 

I'm looking at three funds with different fee structures. Wanted to see what you thought in terms of whether they seem reasonable. Assuming you can't manage your own money but trust each of these managers would you invest with a fund where the fee structure is one of:

1) 1% management and 20% performance fee above 6% hurdle

2) 1.5% management and 20% above 6% hurdle

3) 1.5% management and 25% above 6% hurdle

 

Thanks!

-M

 

[Jurgis]

All of them sound high.

 

But if you really trust them and think they are going to produce great results, then maybe.  8)

 

There may be people to whom I would pay such fees. Very likely these people would not need/want my money.

[investmd]

IMO, all are too expensive. Does NOT make sense to pay BOTH a management AND a performance fee. Huge challenge for a professional manger to beat the markets over time due to a number of logistics. Challenge becomes close to insurmountable when fees are factored in.

 

I don't know of anyone with that structure that has beaten the "best" index over a period of 10-15 years. Would suggest going with a) 0%MER and performance fee with a high water mark hurdle structure, or b) low fee manager or c)index funds.

 

Getting into a situation with management fee and performance fee, means getting into a lot of nebulous hedge fund structures that have not made sense to me when I have tried to understand them.

 

Look forward to hearing other opinions,

[Packer16]

I have re thought in light of how much outperformance you think you can get.  For example, let's say stock expected returns going forward are 6% & you think the manager can outperform by 5% per year (B. Graham's minimum per the Intelligent Investor), then with a 1% & 20% over 6% you are paying the manager 40% of the excess return.  What business do you know of that you can invest in & get 60% of the incremental return for just providing the capital & collecting the check in the mail?  Not too many being a passive investor.  Now if you are adding to the outperformance then you can expect more.  If you want to DIY you can save the fees but those are the alternatives I see. 

 

Packer

[Hielko]

IMO, all are too expensive. Does NOT make sense to pay BOTH a management AND a performance fee. Huge challenge for a professional manger to beat the markets over time due to a number of logistics. Challenge becomes close to insurmountable when fees are factored in.

 

I don't know of anyone with that structure that has beaten the "best" index over a period of 10-15 years. Would suggest going with a) 0%MER and performance fee with a high water mark hurdle structure, or b) low fee manager or c)index funds.

 

Getting into a situation with management fee and performance fee, means getting into a lot of nebulous hedge fund structures that have not made sense to me when I have tried to understand them.

 

Look forward to hearing other opinions,

A fund that doesn't charge a management fee, but only a performance fee is IMO not ideal. Without regular income there is a strong incentive to try to get performance fees, whatever the cost. Better to blow-up trying to get to high-water mark, than getting stuck with zero income.

[mhdousa]

I have re thought in light of how much outperformance you think you can get.  For example, let's say stock expected returns going forward are 6% & you think the manager can outperform by 5% per year (B. Graham's minimum per the Intelligent Investor), then with a 1% & 20% over 6% you are paying the manager 40% of the excess return.  What business do you know of that you can invest in & get 60% of the incremental return for just providing the capital & collecting the check in the mail?  Not too many being a passive investor.  Now if you are adding to the outperformance then you can expect more.  If you want to DIY you can save the fees but those are the alternatives I see. 

 

Packer

Interesting perspective, Packer, especially as you may be fairly familiar with fee structure #1 above.  ;)

 

Thanks for the thoughts.

[mhdousa]

IMO, all are too expensive. Does NOT make sense to pay BOTH a management AND a performance fee. Huge challenge for a professional manger to beat the markets over time due to a number of logistics. Challenge becomes close to insurmountable when fees are factored in.

 

I don't know of anyone with that structure that has beaten the "best" index over a period of 10-15 years. Would suggest going with a) 0%MER and performance fee with a high water mark hurdle structure, or b) low fee manager or c)index funds.

 

Getting into a situation with management fee and performance fee, means getting into a lot of nebulous hedge fund structures that have not made sense to me when I have tried to understand them.

 

Look forward to hearing other opinions,

A fund that doesn't charge a management fee, but only a performance fee is IMO not ideal. Without regular income there is a strong incentive to try to get performance fees, whatever the cost. Better to blow-up trying to get to high-water mark, than getting stuck with zero income.

 

Yeah, I've heard this argument made and it makes some sense. What I'd like to see is a fund that has a management fee up until a certain AUM and then just goes with a performance fee.

[KJP]

IMO, all are too expensive. Does NOT make sense to pay BOTH a management AND a performance fee. Huge challenge for a professional manger to beat the markets over time due to a number of logistics. Challenge becomes close to insurmountable when fees are factored in.

 

I don't know of anyone with that structure that has beaten the "best" index over a period of 10-15 years. Would suggest going with a) 0%MER and performance fee with a high water mark hurdle structure, or b) low fee manager or c)index funds.

 

Getting into a situation with management fee and performance fee, means getting into a lot of nebulous hedge fund structures that have not made sense to me when I have tried to understand them.

 

Look forward to hearing other opinions,

A fund that doesn't charge a management fee, but only a performance fee is IMO not ideal. Without regular income there is a strong incentive to try to get performance fees, whatever the cost. Better to blow-up trying to get to high-water mark, than getting stuck with zero income.

 

A good reason to ask how much of the manager's personal wealth is currently invested in the fund. 

[jmp8822]

IMO, all are too expensive. Does NOT make sense to pay BOTH a management AND a performance fee. Huge challenge for a professional manger to beat the markets over time due to a number of logistics. Challenge becomes close to insurmountable when fees are factored in.

 

I don't know of anyone with that structure that has beaten the "best" index over a period of 10-15 years. Would suggest going with a) 0%MER and performance fee with a high water mark hurdle structure, or b) low fee manager or c)index funds.

 

Getting into a situation with management fee and performance fee, means getting into a lot of nebulous hedge fund structures that have not made sense to me when I have tried to understand them.

 

Look forward to hearing other opinions,

A fund that doesn't charge a management fee, but only a performance fee is IMO not ideal. Without regular income there is a strong incentive to try to get performance fees, whatever the cost. Better to blow-up trying to get to high-water mark, than getting stuck with zero income.

 

A good reason to ask how much of the manager's personal wealth is currently invested in the fund.

 

+1

 

I have the vast majority of my net worth invested in my fund - I am very uninterested in "blowing-up" to possibly make a performance fee.

[mhdousa]

IMO, all are too expensive. Does NOT make sense to pay BOTH a management AND a performance fee. Huge challenge for a professional manger to beat the markets over time due to a number of logistics. Challenge becomes close to insurmountable when fees are factored in.

 

I don't know of anyone with that structure that has beaten the "best" index over a period of 10-15 years. Would suggest going with a) 0%MER and performance fee with a high water mark hurdle structure, or b) low fee manager or c)index funds.

 

Getting into a situation with management fee and performance fee, means getting into a lot of nebulous hedge fund structures that have not made sense to me when I have tried to understand them.

 

Look forward to hearing other opinions,

A fund that doesn't charge a management fee, but only a performance fee is IMO not ideal. Without regular income there is a strong incentive to try to get performance fees, whatever the cost. Better to blow-up trying to get to high-water mark, than getting stuck with zero income.

 

A good reason to ask how much of the manager's personal wealth is currently invested in the fund.

 

+1

 

I have the vast majority of my net worth invested in my fund - I am very uninterested in "blowing-up" to possibly make a performance fee.

 

Curious what your fee structure is, if you don't mind disclosing. Thanks.

[jmp8822]

IMO, all are too expensive. Does NOT make sense to pay BOTH a management AND a performance fee. Huge challenge for a professional manger to beat the markets over time due to a number of logistics. Challenge becomes close to insurmountable when fees are factored in.

 

I don't know of anyone with that structure that has beaten the "best" index over a period of 10-15 years. Would suggest going with a) 0%MER and performance fee with a high water mark hurdle structure, or b) low fee manager or c)index funds.

 

Getting into a situation with management fee and performance fee, means getting into a lot of nebulous hedge fund structures that have not made sense to me when I have tried to understand them.

 

Look forward to hearing other opinions,

A fund that doesn't charge a management fee, but only a performance fee is IMO not ideal. Without regular income there is a strong incentive to try to get performance fees, whatever the cost. Better to blow-up trying to get to high-water mark, than getting stuck with zero income.

 

A good reason to ask how much of the manager's personal wealth is currently invested in the fund.

 

+1

 

I have the vast majority of my net worth invested in my fund - I am very uninterested in "blowing-up" to possibly make a performance fee.

 

Curious what your fee structure is, if you don't mind disclosing. Thanks.

 

It's 25% above a 6% return, resetting annually. High water mark to not allow a loss, then a performance fee because of getting back to even. The docs have a 2% fee that I waive. My attorney told me to add it initially because if I ever wanted to pivot later (charge mgmt fee) I would need new docs.

[SharperDingaan]

Hi all -

 

I'm looking at three funds with different fee structures. Wanted to see what you thought in terms of whether they seem reasonable. Assuming you can't manage your own money but trust each of these managers would you invest with a fund where the fee structure is one of:

1) 1% management and 20% performance fee above 6% hurdle

2) 1.5% management and 20% above 6% hurdle

3) 1.5% management and 25% above 6% hurdle

 

Thanks!

-M

 

You may want to look at this a little differently.

What if the 6% is in the last 2% of the 'bell curve' of returns? and the mean is actually closer to 4.5% (but unknown)?

 

Pay 1.5%, and most of the time you will be giving up 33.33% (1.5/4.5) of your annual return. For what?

And if the portfolio is 1M (500K equity + 500K margin), that 1.5% is now also 15K and not 7.5K. For what? 

 

If you did nothing more than annually commission an advisor to review your position and write you a report, a 2-5K fee would be very generous . Thereafter it's simply a low-cost self-directed execution of the reports recommendations, that you could easily do yourself. So what additional value-add are you getting for your 1.5%?  and is it enough for what you are paying?

 

Different strokes, but questions that have to be answered.

You're the person paying the bill.

 

SD

 

[chrispy]

Hi all -

 

I'm looking at three funds with different fee structures. Wanted to see what you thought in terms of whether they seem reasonable. Assuming you can't manage your own money but trust each of these managers would you invest with a fund where the fee structure is one of:

1) 1% management and 20% performance fee above 6% hurdle

2) 1.5% management and 20% above 6% hurdle

3) 1.5% management and 25% above 6% hurdle

 

Thanks!

-M

 

You may want to look at this a little differently.

What if the 6% is in the last 2% of the 'bell curve' of returns? and the mean is actually closer to 4.5% (but unknown)?

 

Pay 1.5%, and most of the time you will be giving up 33.33% (1.5/4.5) of your annual return. For what?

And if the portfolio is 1M (500K equity + 500K margin), that 1.5% is now also 15K and not 7.5K. For what? 

 

If you did nothing more than annually commission an advisor to review your position and write you a report, a 2-5K fee would be very generous . Thereafter it's simply a low-cost self-directed execution of the reports recommendations, that you could easily do yourself. So what additional value-add are you getting for your 1.5%?  and is it enough for what you are paying?

 

Different strokes, but questions that have to be answered.

You're the person paying the bill.

 

SD

 

When talking to financial advisers, the recommendation is typically fee based and not % of assets.  Interesting that when it comes to funds, it becomes % of AUM...

[investmd]

 

 

It's 25% above a 6% return, resetting annually. High water mark to not allow a loss, then a performance fee because of getting back to even. The docs have a 2% fee that I waive. My attorney told me to add it initially because if I ever wanted to pivot later (charge mgmt fee) I would need new docs.

 

Only know a few structures world wide like that. Would you provide a link?

[Homestead31]

i think you are asking the wrong question.

 

David Swenson from Yale has talked about this. 

 

Trying to judge a fund based on its fees alone doesn't make any sense.  What matters is after fee returns.

 

Over 30 years, 2% out performance results in something like 70% more in ending capital.

 

If you don't have the skill set  or confidence to out perform on your own, does it matter what it costs to out perform as long as after fees you are out performing?  In other words, if on your own you think you could do 7% per year, or that an index fund could do 7% per year, does it matter if you are paying 1 and 10% or 2 and 20% if you end up with 9% after fees?  in either case, you end up with 70% more money in the end!

 

the wrinkle of course is that you need to make sure you are getting what you pay for.  if you are considering large cap managers that run $5B, their chances of out performance are pretty slim.  if you are considering managers that have pledged to stay small, and consistently find value in off the beaten track investments, and have a track record of success, i would argue it is worth paying up for them.

 

this is also where the hurdle comes in.

 

if you don't have the skill set or confidence to invest on your own, i think the proper way to think about it is, "i could go to merrill lynch etc and they will charge me 1%, and then pick stocks from the list of 3,000 names they have under coverage, 90% of which are rated as buy or hold, which means i will basically get an S&P return."  Or, keeping in mind that most people think the SP500 is likely to return 4-6% over the next decade, you could say "I will pay a unique manager 1% with a 6% hurdle, meaning that he is paid the same as the guy picking from 3,000 buys and holds, unless he is able to outperform by being unique.  if he is able to outperform, he will get a cut of that out performance."

 

for what its worth, 6% is considered to be a high hurdle for these reasons.

 

 

[Tim Eriksen]

i think you are asking the wrong question.

 

David Swenson from Yale has talked about this. 

 

Trying to judge a fund based on its fees alone doesn't make any sense.  What matters is after fee returns.

 

Over 30 years, 2% out performance results in something like 70% more in ending capital.

 

If you don't have the skill set  or confidence to out perform on your own, does it matter what it costs to out perform as long as after fees you are out performing?  In other words, if on your own you think you could do 7% per year, or that an index fund could do 7% per year, does it matter if you are paying 1 and 10% or 2 and 20% if you end up with 9% after fees?  in either case, you end up with 70% more money in the end!

 

the wrinkle of course is that you need to make sure you are getting what you pay for.  if you are considering large cap managers that run $5B, their chances of out performance are pretty slim.  if you are considering managers that have pledged to stay small, and consistently find value in off the beaten track investments, and have a track record of success, i would argue it is worth paying up for them.

 

this is also where the hurdle comes in.

 

if you don't have the skill set or confidence to invest on your own, i think the proper way to think about it is, "i could go to merrill lynch etc and they will charge me 1%, and then pick stocks from the list of 3,000 names they have under coverage, 90% of which are rated as buy or hold, which means i will basically get an S&P return."  Or, keeping in mind that most people think the SP500 is likely to return 4-6% over the next decade, you could say "I will pay a unique manager 1% with a 6% hurdle, meaning that he is paid the same as the guy picking from 3,000 buys and holds, unless he is able to outperform by being unique.  if he is able to outperform, he will get a cut of that out performance."

 

for what its worth, 6% is considered to be a high hurdle for these reasons.

 

my sentiments exactly

[LC]

i think the proper way to think about it is, "i could go to merrill lynch etc and they will charge me 1%, and then pick stocks from the list of 3,000 names they have under coverage, 90% of which are rated as buy or hold, which means i will basically get an S&P return."  Or, keeping in mind that most people think the SP500 is likely to return 4-6% over the next decade, you could say "I will pay a unique manager 1% with a 6% hurdle, meaning that he is paid the same as the guy picking from 3,000 buys and holds, unless he is able to outperform by being unique.  if he is able to outperform, he will get a cut of that out performance."

 

I don't agree with this part. Why are those your only two options? Why bother paying that 1% in the first place to Merrill for S&P performance? Just buy the SP500 index. 

 

From a client's perspective, the best situation is to invest with a manager whose net worth is tied to the fund (downside protection), and who is paid on a performance basis above the risk-less alternative (incentivize upside).

 

If I had a few million to my name and I wanted to start a fund, I would charge a 20% performance fee above the 10-year treasury rate hurdle.

 

[SharperDingaan]

For most people; it's either buy an index (ie: o/g) - or buy the individual equities.

Both are just trading vehicles.

 

Most times the index is by far the more attractive of the two - if only because its more o/g companies, and more liquid.

I care only about lowest cost (<1%/yr), and hold it purely to trade the index cycle; the fund manager is of minimal value-add to me, as I have no intent to 'buy and hold forever'.

 

I buy equities because I expect to be there a long time; either by intent, or because I screwed up - and now need to 'work it out'.

I'm there as the garbage man; buying the hated when they stink, and selling for gold later when the smell ain't so bad anymore. Like the garbage man I'm paid to put up with the stink, and process sh1t into compost. The 'money in muck'.

 

Nobody wants the garbage man at their cocktail party; if you want adoration, don't buy sh1t - buy quality business. Sound familiar?

The garbage men or women dressed in Armani or Dior don't smell  :D

 

Hence what value-add is your fund really offering you?

I could easily replicate the 'promise' of more money by simply buying a wad of lottery tickets every month, & get better odds.

 

There are of course a great many people who are very good at what they do; many of whom post on this board.

But if your expectations are not realistic, nobody can help you.

 

SD

 

 

 

 

 

 

 

   

 

[Homestead31]

i think the proper way to think about it is, "i could go to merrill lynch etc and they will charge me 1%, and then pick stocks from the list of 3,000 names they have under coverage, 90% of which are rated as buy or hold, which means i will basically get an S&P return."  Or, keeping in mind that most people think the SP500 is likely to return 4-6% over the next decade, you could say "I will pay a unique manager 1% with a 6% hurdle, meaning that he is paid the same as the guy picking from 3,000 buys and holds, unless he is able to outperform by being unique.  if he is able to outperform, he will get a cut of that out performance."

 

I don't agree with this part. Why are those your only two options? Why bother paying that 1% in the first place to Merrill for S&P performance? Just buy the SP500 index. 

 

From a client's perspective, the best situation is to invest with a manager whose net worth is tied to the fund (downside protection), and who is paid on a performance basis above the risk-less alternative (incentivize upside).

 

If I had a few million to my name and I wanted to start a fund, I would charge a 20% performance fee above the 10-year treasury rate hurdle.

 

those are definitely not "your" only two options, and without a doubt, index funds are the best choice for most people.  however, the original poster was specifically asking about actively managed funds he was considering, not index funds.