Sorry for derailing a little bit (happy to take some of the discussion to another thread if people are interested in discussing further).

I'll bump my questions as well then.

HFG left the building.
Bumped my question twice but don't think he wants to answer :'(

Crazy busy day today...way behind the thread...will try to catch up soon!

When he told me of the project he gave me enough details such that I know he was expecting his end (after compensating those who would be assisting him) to be as little as zero.

Someone asked this earlier but I don't remember seeing it answered... what exactly does a top hedge-fund manager do all day? Are you basically staring at a Bloomberg terminal watching stock prices move? Running math calculations? Yelling "Buy! Sell!" into a phone like in the movies? What exactly do you do?

Also, is there ever a point, philosophically, where you find even your own income to be a little bit excessive? For example according to CNN, the top 25 managers took home $21 billion among them in 2013. The compensation must seem almost ridiculous at times, no?

What kinds of professional's assist the HFM the most(ie his right-hand peeps)?

cheers GL

I do think (but I am a biased source, so use your own judgment) that what I do makes the world a better place.

Say there are 10 different early stage pharma companies seeking funding. By studying the proposals for all 10 and accessing expert opinions (medical researchers) perhaps we would assess one is far more likely to succeed than the others and invest. Our decision might be right or wrong, but it would be driven by a process we believe to be objective.

If indeed our process is a good one, we will be profitable. And society benefits from the "positive externality" of having capital allocated in a superior way. We do not capture all that benefit and therefore can feel good about what we do.

At times, various governments have attempted to select certain companies or industries to be "champions" and have invested in them. I believe that often these decisions are driven by considerations other than which company is best--is it located in the constituency of a powerful member of the legislature, etc. To be fair, there was a period when this was considered the ideal (Japan with MITI) but today even the most "centrally planned" economies (China) have set up markets to provide price information to policy makers.

Could say more on this, but will let it go at that for now.

As far as poker, I think the "positive externality" to society of having pro poker players is harder to see. Perhaps the argument there is such a benefit is that poker has proved the training ground of many great investors!

Do you sell mortgage notes? I've bought two non-performing so far that have worked out well.

As per my last answer, I think the positive externality of choosing the best investments for society is large and meaningful. I think a good part of the reason that the US has a large and thriving biotech industry is that the capital markets will provide funding to a promising idea. We see talented people from all over the world move to the US to start these companies (I would argue) due to the superior functioning of our financial markets.

On the Matt Levine column a few thoughts. First of all, I think he is a good writer and thinker and generally enjoy reading him. In this particular case he argues it is "somewhat difficult" to decide which managers have alpha. I agree that it is difficult, but (again) just as with baseball GMs or pro poker players it is possible to make that judgment. If I can name one hedge fund that Matt would not "short" to me (after fees), I think I carry the day (similar to the Billy Beane wager I offered earlier).

And I have heard legend (perhaps only that) that Bill Gates won enough money playing poker his freshman year of Harvard to drop out and use it to fund Microsoft (which might be benefit or a curse to society depending on your view of MSFT!)

If true, those might have been some of the highest stakes poker results of all time!

To all these questions, I think different funds would have vastly different answers. In our case, we hire experienced talented teams to invest in different market sectors and most of our alpha comes from them. At times the "exec rank" has an idea or uses their judgment to put a more sizable position on in an idea generated from one of the teams, and in so doing, add alpha to the funds.

The issue of compensation is a deep and complicated one. We compete for talent on many dimensions, payout rate, amount of capital provided, providing an environment conducive to success (access to research talent) etc. Your question deserves a more interesting and lengthy answer, but will once again defer for now.

I was with you until the evil part!

As David already said, making money on the book is not really the point

The goal of the book is to further and elevate the debate on hedge funds.

Finally getting to some of your questions.

Fee structures are constantly being debated and altered and I am sure that will continue. If any manager fails to justify their fees, they will likely feel the impact of that rather quickly on their AUM.

Competitive landscape...hedge funds have been growing in assets and compete with us for alpha...true. But at the same time the proprietary trading desks of Wall Street banks have largely gone away and they were large and smart alpha seekers themselves. Further, the rise of index funds has reduced alpha seeking more broadly.

I was just joking, I personally think it takes a huge amount of discipline and there is actually quite a bit of risk in writing a book. It is a long term goal of mine as I view the inputs, process, and outputs as very challenging intellectually.

hfg, thx for doing this thread!

A couple of basic questions:

What are the most common misconceptions about your day-to-day work that you encounter from people outside the industry?

What kind of hours/vacations do you put in - and to what degree does it vary between you and the bottom guys?

Misconceptions--I think people think we are a bunch "Wolf of Wall Street" types. The reality is much more prosaic. We are mostly math geeks of various types. Our trading floor is surprisingly (to most) quiet.

I haven't had a "week on the beach no mobile phone" vacation in years. I enjoy my job and I travel a large amount and I try to schedule some fun events around those trips--mini vacations.

On average managers that work harder do better I suppose, but I don't think that has the highest R^2 as a predictor. I think it is more important to have a clarity of thought on how markets work (or what are the conditions in which markets are most irrational) and a thought process on how best to find alpha. Sorry if this is a little vague.

Hedgefundguy,

I'm currently looking to invest in hedge funds for the first time and I have some questions:

-Are there any strategies that you'd recommend totally avoiding?
-It seems difficult to find top-performing funds (I'm looking for alpha and a longer history) that are still open to new individual investors in their flagship funds. Is the current environment really so overflowing with money that new investors are shut out or maybe it's the case of knowing somebody? Even if the fund is seemingly open, they usually are pretty unresponsive.
-There are many funds that seem to be doing poorly for many years by all measures, yet they still have a lot of AUM. What's the deal?
-If you were to invest your own money into other hedge funds, about how many funds would you estimate are worth investing in? Just a handful, tens, hundreds?
-Would you avoid funds with shorter track records (let's say less than 5 years)?
-Would you avoid funds with low AUM (let's say less than $50 MM)?

Thanks.

Do you think a portion of the hedge fund industry masquerades as generating alpha ideas when in reality they are probably just overweight/underweighting beta?

As I said earlier in the thread, I rarely think investing in hedge funds is wise/optimal but all but a handful of high new worth individuals given (among other reasons) the taxation issues. Institutions often have a tax status that makes it much better for them.

Not sure there are that many funds who have poorly for years that are still large.

I would think 100 or so.

In general shorter track records are worse as you have less information to judge if the team has alpha. However, if the investment case was compelling I would not preclude investing in a newer fund.

Similar answer for low AUM funds. Sometimes low AUM funds will have fixed costs that make their effective fees rather high. Some managers will cap those expenses to make it better for investors during the ramp up phase.

Yes

A large portion?

If this portion is simply just overweight/underweight beta, do they deserve management fees?

Not large, but some. I think this is bad practice in general, and especially so if they are not forthright about it.

I saw you using sharpe ratio's as a way to measure performance of Millennium earlier in this thread.

------------------------------------
1. Is a sharpe ratio the best way to measure performance by a Hedge fund in your opinion(As with many people, I don't agree that volatility = risk, especially when valuing equities)??

2. What is the best way to gauge risk-adjusted performance of your own fund, and do you publish these figures??

3a. Do you think there are better metrics/ratios out there to measure how much true alpha a hedge fund is delivering??

3b. Do you believe that a hedge fund can create a pricing structure where they only get paid on the excess alpha(defined by your answer to 3b) generated??

On vol vs risk see point 1 on this:

http://www.cfapubs.org/doi/pdf/10.2469/faj.v70.n1.2


Sharpe is not perfect (no one measure is) but if I could know only one thing, I think that would be it.

When it comes to fees, I want to make the following point. You should measure/discuss fees per unit of "alpha effort".

If you invest in an index fund it may charge 10bp, but does not seek to find alpha. That does not make it bad (in fact, for most small individual investors this is not a bad choice at all).

You can invest in a long only alpha seeking manager that may charge 50bp (or more) and 90% of their risk is beta (which you could have got for 10bp in an index fund) and 10% of their risk is actual stock selection alpha. Per unit of "alpha effort" they are charging 4% fees the way I see it.

If a hedge fund runs a portfolio that is beta neutral (hedged), and say it uses one turn of leverage, you could say it is delivering 200% alpha effort on a 2 and 20 fee structure. Just for math sake, say the manager earns a 17% gross return (not bad), they would earn 5% fees for 200% alpha effort, or 2.5% per unit...measured this way the fees are actually lower.

You could invest in a mix of index funds and hedge fund managers to replicate the same mix of alpha and beta as a long only manager at a lower cost!

When hedge fund managers replace alpha with beta, they are (in my way of seeing things) increasing their fees.