Hedge Fund Manager Has An Epiphany

By on November 13, 2010

Anita Raghavan, writer for The N. Y. Times Dealbook, has penned a piece about former hedge fund manager Lars Kroijer. Kroijer has authored a book called, “Money Mavericks, Confessions of a Hedge Fund Manager.” Kroijer comes to a conclusion we’ve known here a long time:

He now thinks that the fees are too high in many cases and that investors would be better off putting their money in a Vanguard index mutual fund.

Hedge funds typically charge an annual management fee of 2 percent and a performance fee of 20 percent, meaning investors keep 80 percent of the gain. Fund managers justify the fee structure by saying that they do well only when you do. Mr. Kroijer, who started his fund with $3.5 million and increased its assets to about $300 million, charged a management fee of 1.25 percent and a performance fee of 20 percent.

It’s not that complicated as Kroijer aptly points out:

His conclusion: Even if a hedge fund had a return of 10 percent before trading expenses, an investor would wind up with a little less than 3 percent. That’s because there are so many fees to pay. Among them are fees for fund of funds and pension managers, not to mention, of course, the expense of the hedge funds.

If the hedge fund had gotten its 10 percent return by simply going “long” or being bullish the market in a year when the market was up 10 percent, than an average investor would have been better off buying a Vanguard index fund and paying 0.2 percent in total fees rather than the 7 percent.

Source: Dealbook
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One Comment

  1. Mutual Funds

    November 13, 2010 at 8:07 am

    Thanks for the post.

    Best Regarding.
    Mutual Funds

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