The Investment Scientist

Why allowing hedge funds to market directly to the public is a great idea

Posted on: June 6, 2013

Is this your fund manager?

Is this your fund manager?

Securities and Exchange Commission Chairman Mary Jo White supports a new rule that would allow hedge funds to market directly to the public. I think that’s a fantastic idea. Let me explain why.

Between 1998 and 2010, hedge fund managers earned “only” $379 billion in fees. Do you know how much they made for investors?

Before you answer that question, you should be aware that one-third of hedge fund money is channeled through funds of funds. Their managers need their cut too. Between 1998 and 2010, their take was about $61 billion.

This leaves a whopping $9 billion for investors. That’s not too shabby considering they barely do anything other than blindly hand over their money.

Oh wait! Many of these investors were persuaded to invest in hedge funds and funds of funds by their family offices, private bankers, or wealth managers, so they deserve fees too. Though data are not available, their take is probably in the billions of dollars.

While the investors got little in monetary returns, they do get the bragging rights that they were in last year’s hot funds, don’t they?

What’s unfair about the existing hedge fund rule is that only the top 1% get that bragging rights. The rest of us don’t even know such a wonderful opportunity exists to transfer our wealth to the hedge fund managers who are really the top 0.1%.

With the hard work of Chairman White, that is about to change.

Get my white paper: The Informed Investor: 5 Key Concepts for Financial Success.

2 Responses to "Why allowing hedge funds to market directly to the public is a great idea"

Adding injury to injury, hedge fund managers pay only 15% capital gains tax on their salaries because of a flawed law. Hedge fund managers have bribed politicians (a.k.a. paid campaign contributions) to keep that loophole in place. They can well afford it- top hedge fund managers have raked off over $1Billion per year in fees _per_year_. Investors pay higher tax rates, a mix of long term & short term capital gains and regular income taxes due to the faster trading / higher turnover of assets. Not only would it be ~22 times* cheaper in direct costs to use a low cost index fund, the tax hit is lower to the investor.

(* I assumed hedge funds charge 2% of assets plus 20% of returns [1.4% = 7% market average * 0.2] plus fund fees or stock trade costs of another 1% [for simplicity] for a total of 4.4% per year. I may be seriously underestimating expenses, but not over. Lost cost funds charge about 0.2%.)

Jerry,

I visited a multi-family office the other day, and they channeled 50% of their clients money to hedge funds. The whole system is setup to transferred wealth from investors to managers.

If the victims are just the top 1% who are dump enough to let these people do that to them, I wouldn’t be so much against it.

With advertising, the victim base will expand 10x to middle class folks as well.

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Author

Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC. He is also a regular contributor to Morningstar Advisor and Physicians Practice. To explore a long-term wealth advisory relationship, schedule a discovery meeting (phone call) with him.



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