When you read this article in the FT, it discusses how a hedge fund is returning money to investors.
Nothing new or interesting. Or is it?
Here’s a paragraph “Hedge funds have become increasingly wary in recent years of growing their assets too much, after seeing the performance of a number of large funds suffer. Extra assets can mean higher management fees for the fund’s managers, but becoming too large is increasingly seen as hindering performance because it can make it harder for managers to sell out of positions quickly and easier for rivals to identify their trades.”
This is a catch 22. Investors want performance. Fund managers want assets. Your assets. The more assets they manage, the more fees they rake in. Investors, therefore, need to be thoughtful when allocating their capital to think about the size of a fund. A large fund can make some good decisions, but the outcome in terms of returns may not be that significant in context. Big funds are better for fund managers, not necessarily their investors!
It’s also important to understand rhetoric and words. Funds use the word ‘bets’, especially hedge funds. If the ‘bet’ comes off, the fund manager looks great. If they do not, nothing much happens. Investors don’t tend to take action when they should. Investors tend to give managers 2nd, 3rd, 4th 5th chances to improve when they should take action sooner.
The end game for a fund manager is not to make investors wealthier, but to make themselves wealthier. They are not in business to be altruistic. Wherever possible, it is better you make your own decisions and as you are unlikely to have billions to invest, you can be rather more nimble. Too big bring’s down long term returns and outperformance is likely to fail.