Quote:
Originally Posted by Dr McGriddle
What are your thoughts on the 2 / 20 fee structure and the evolution of fund fees in the future?
There have been a few questions on hedge fund fees and I would like to start to answer. Might not get all the way through this post but will have a start.
Instead of discussing hedge funds directly, let's use a poker staking analogy.
Imagine Phil Galfond is in the following situation. He is regularly playing in a 100/200 NL Holdem game where he has an hourly win rate of $200 and an hourly standard deviation (SD) of $2000.
He has an opportunity to move to a 200/400 table where his hourly win rate is $350 dollars and hourly SD is $4000. But Phil is reluctant to do so because, even though his win rate rises, the increased SD puts too much of his bankroll at risk.
You offer to share half the risk on the new table for half the profits, but Phil immediately recognizes this is not a good idea as (for him) this now means the new table has an hourly rate to him of $175 (350/2) and SD of $2000--worse than the table he is at now.
But, being the clever guy he is, he offers you the following:
He will agree to play 1600 hours at the higher stakes table if you--
Agree to share 50% of any net losses at the end of this period of play.
You agree to take only 40% of any net gains
and you pay him an hourly "management fee" of $20/hour.
Some questions for all of you:
Is this new deal better for Phil than staying at the smaller stakes table?
Is this a good deal for you? What percentage of the time will you win in this staking arrangement?
Do you see how this is similar to the 2/20 hedge fund model?