Some Multistrategy Hedge Funds Keep Over Half of Their Profits (Bloomberg)
I'm not sure if Bloomberg's reporting is misleading, or investors are getting stiffed, or I'm just not understanding what's being written here, but:
Clients received 41 cents of every $1 made by multistrategy funds that passed on all their costs last year, according to a survey by the prime brokerage unit of BNP Paribas SA. Their share is down from 54 cents in 2021, reflecting a startling new reality where the most popular funds effectively have a blank check for expenses.
I know MM HF fees have been discussed before, but this discussion takes place in various pieces in various threads, and I haven't really pieced it all together. Can anyone provide clarity on the above quote? Because it makes it seem like (certain) MM HFs are effectively able to charge >50% fees (which I don't think is actually the case).
Here's an example. The general fund makes 20% gross. it takes 2% management fee, 25% pass thru fee for the PM (5% of AUM), and 20% performance fee for the management company (3% of AUM). After all fees (2+5+3 = 10%), LPs are left with 10% net return or 50% of the gross return.
Is the 25% pass through standard and always based on the gross return before mgt fees? Is the performance fee charged based on the gross return after the mgt fee?
No it is a number I made up for sake of example. The pass thru fees represent all bonuses paid to the PMs and guarantees paid to losing PMs. So even if PMs get an industry standard 20% payout, the losers can drive that number higher since there is no netting of wages between pods. Nowadays T1 MMHFs like Citadel can also charge investors for infrastructure development. At Citadel the pass thru fee is actually just wrapped into the management fee which can vary between 3-6%. ie investors agree to reimburse 100% of all expenses related to running the fund. This caused Citadel some PR problems years ago when they wanted to license some software to the street but it was developed using the management/pass thru fees paid by the LPs who would not participate in the software sales.
I have no idea you'd have to read your LP agreement.
The above example is directionally correct, though almost none of these cost pass-thru funds charge a management fee. The fact that all types of admin and infrastructure costs are passed through negates the need for a management fee. But yeah, if structure opex were roughly 2% of AUM, thr numbers would be as the prior poster presented.
In the end it's a big headline, but there are nuances: Citadel keeps printing 20% annually AFTER fees and is closed to new investors (even returning money to existing ones), while some of the newer MMs are posting low single digit net returns that are hard to defend. Yes, they are charging high fees, but they will be forced into shutting down soon (Schonfeld case in point?).
Is Schonfeld closing down? I thought they've been able to raise few billions.
My thoughts too. They just raised capital and hired a bunch of people on the investment side, so this seems news to me too.
This is clear and true but yes a bit clickbait.
50% is not 50% on the clients assets.
This is half of the profit made
So if the fund report 10%
It means they did 20% gross, and took 10% fees
If you want an example in $ a 1bn$ fund made 200M$ gross, took 100M$ of fees, net performance (which is what is reported) is 100M$
Now think u are a client :
Do y prefer 10% net on a fund that makes 20% gross
Or 5% net on a fund that does 7% gross
Clients care about what is left in their pockets. Of course they try to get as much as possible and pressure on fees. But if practice, you can charge much more as long as in net performance you are above the competition
This is the key point. LPs may care about gross return because they need to worry about alignment with managers but for the most part they're comparing net returns across managers. The MMs and top multi strats have killed it performance wise for a decade and a half now. Most of them are closed off to new investors because they're cognizant of the capacity constraints of their investment strategies. They get to set the terms. Trust me, you'd love to have your money with Citadel, getting 15-20% net returns through whatever cycle. Unfortunately the Wellington fund only has room for ~$40-50bn of assets so they don't need any more investors.
I still get super confused with how the pass through structure works, but no one every explained it to me. Maybe I am an idiot, but if someone could walk through an example with numbers it would be helpful. I've been assuming its something like: 1) operating costs for the fund each year may change, but we charge LPs for operating costs no matter what so we break even there; = effectively a 3%-6% mgmt. fee probably? 2) Then there is some final payout performance fee that is based upon all of the pod agreements where the PMs get to keep 10%-15%-20% of their PnL; = effective performance fees of 20%? ; 3) then there is some additional markup perf. fee that the HF owners get to keep for themselves?
Like, let's say I have $100 of client money and make 20% gross ($20).
Salaries of all employees + infrastructure + running the biz day to day = $5/yr (effectively a 5% fee?)
Usually I hear of ~15% PnL agreements for PMs. Let's assume all PMs performed the same or its 1 PM or w/e, so they get to keep 15% of the $20, so they get $3. Now we are at $8 off of that $20 going to the HF?
What about the management company / Ken Griffin's fee - what is their slice? Was that already embedded somewhere?
Again, maybe I am a total friggin idiot, but I just don't understand what slice everyone is getting paid out of
[Deleted...I'll defer to others since it looks like I might have misunderstood and don't want to put out incorrect info].
Yes, Ken Griffin gets paid through the 3) performance fee that you first mentioned.
Can you lay out the math using the numbers in mtnmaster1's post above? Genuinely curious to know. Thanks.
As mentioned this seems clickbait and mis-leading cause its acting like investing in a MM is no different than an LP investing in 5 different SMs. When in fact LPs are investing in a business and not just a fund manager.
MMs for the most part run very lean and are very meticulous on tracking fees/costs. That said they are constantly growing the business and re-investing in it no one from the outside is going to know the exact costs to operate that business but the agreement with most LPs is they pay all operating costs (infrastructure buildout, new PM hires, shared resources, non-shared resources, Ken’s fee…etc). In fact some unique MM strategies have required them to do deals with LPs to lock-up capital for 3+ years sort of thing.
While in a SM world from what I know, you get the 2% or so fee and that is the investment team’s budget and that # is set in stone.
Compared to SMs who underperform so basically keep an infinite % of their excess returns in fees…
Did some quick maths with rough assumptions, happy to have your thoughts
AuM 50bn$
Gross perf 10bn$/20%
In case of a 3/30 model:
I think the fund would take 5.1% of perf fees:
30% of 17% (net perf after the fix fees)
So a total or 8% fees on capital or 40% of the returns made
In $: 4bn$ fees, hence 6bn$/12% net return for clients
In case of 50% profit going to the fund:
Out of 10bn$ gross perf:
5bn$/10% fees, 5bn$/10% return for clients
Now who exactly get these fes:
Gross pnl is 10bn$
I assume PMs up made 12bn$ and PMs down lost 2bn$
With an average payout of 15% that makes 1.8bn$ (0.15*12) to pay investment teams.
That means between 2.2bn$ and 3.2bn$ (depending on 3/30 or 50% fees scenario ) left for infra/ops/support and for the partners
I have no idea how much costs infra/ops/support represent for a 50bn$ fund. So I have to stop there.
Happy to be challenged on those rough numbers
think the 3/30 example looks spot on. avg payout to PMs probably higher and some costs taken by PMs directly. large share of residual 2.2bn in your example going to owners a la Ken and the likes.
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