Private Equity & Hedge Funds
As this has become a bigger and bigger part of the investment world I was wondering how brokers putting their clients into these investments get paid. How much (percentage wise)? Commission based on the initial investment? Is there some sort of recurring revenue?
Take note of the new private equity ETF that was recently put out by Powershares. Soon there is also going to be an agriculture ETF.
This doesnt answer your question but I thought it might be of interest.
Traditional financial advisors are not going to mess with these.
Possibly, a wealth manager that caters to UHNW folks might have a
couple hedge fund managers that he works with. The hedge funds
are already loaded down with fees and costs, and are very risky. Also,
they are extrememly tax unfriendly( an exception would be an off-shore
fund, which most managers will have one of each) I really feel that we
are in a hedge fund bubble. There might be more hedge funds right now
then mutual funds. People are starting them up, because the money is
phenomenal for the money manager. Typically, the money manager takes 2%
of the assets along with a 20% portion of the profits gained. Some take
more. I have read 10+ books on hedge funds. It is extremely hard to
track the performance of hedge funds b/c they don’t have to report
their performance, and you either get eye-popping performance b/c the
manager is happy to report or one shuts down b/c it went belly up. So
you get the extremes often times. I will say this, I believe at the end
of the day it is better to have your clients in a good mutual fund or
funds. I read an article a few weeks back about one hedge fund titan,
and he basically said the days of quick equity trading were over, and
he is more buy and hold now, like most mutual funds. Having said that,
he said he would typically hold something for 6 months, to clarify the
buy and hold aspect. I have had the pleasure to see a hedge fund
manager in action. A good friend of mine’s father runs a 2 billion
dollar shop, with about 4 funds. He is pure genius. MBA from Harvard
and common sense to boot. He has been doing it since 1990 which he
started with 5 million of his own money. In my opinion he does it
right. He only takes about 1% of the assets and then 20% of the
profits. Sorry if this post is “here and there” , I’m ADD. Anyway, I’m
not that knowledgable on private equity and I would love to learn more
if someone wants to add something. Final note, Hedge Funds have become
ironic b/c the majority of them are not hedged. The whole idea when
they started (which the first one was I believe in the 40s) was to be
obvioulsy hedged, with short positions and options. There are 20
something, probably more strategies, but the most popular is long/short
equity. This obviously is something that mutual funds can’t do. Anyway,
most of these managers make big bets and shoot for the moon, and the
only way to do that is to increase the risk. So in that lies the
problem with the hedge funds. I think we can relate that to Aramanth
and LTC. Not to mention most of the ones that go belly up are highly
leveraged. I’ve read that LTC was leveraged up to 30 times their
original capital. What you have realized is that the hedge funds do
have a tremondous market presence, and they can help you and me both.
They create great buying oppurtunities when they dump a large position.
Case in point this year JNJ, and YHOO.
OK to answer your question. The way I may get paid on a hedge fund would be 30-40bps reoccuring on the asset base. Some will also pay a portion of the hedgies incentive fee. For example I get 25% of the incentive fee as gross for ISA Ichibaboshi L.P. in addition to 30bps. reoccuring. Their incentive fees will vary. I usually see 10% but as rook said that can be much higher.
Generally there may be a placement fee that the broker also gets that may be 1% or so. Each one is a little different.
that’s what i’m looking for!! good job rook and malcolm. i appreciate the input. anyone else have anything to add? it seems like their presence everywhere should be telling everyone something shouldn’t it? (i.e. that space is very bloated and overbought?)
Good point Guest,
I failed to mention that since there are so many hedge funds out there,
they are literally bumping into one another. There is too much money
chasing too few ideas. Also, I forgot to mention the fund of funds.
This is generally a preferred way to go about investing in hedge funds,
but it adds to the costs. If I were going to put clients in one, I
would just assume know the guy and have him be older. Its been proven
that the older guys are more conservative, mainly b/c most if not all
their capital is tied up in the fund, and they don’t want to take as
It is oversaturated and, at the same time, it's not. The thing that one needs to identify is who the managers are and what their strategies are. The ones that I've seen that have stuck around the longest are the ones that were extremely successful as a mutual fund manager.
Many HFs are pulling top tier fund managers to launch new strategies within the firm and compensating them extremely higher than they would be on the MF side.
We'll see some companies implode, while others will thrive. As with any product, due diligence is key to the success within this side.
would i be incorrect by assuming that the lack of transparency regarding many of these types of investments allows for, shall we say, ‘side deals’ of some sort that the advisor gets some ancillary compensation for steering clients in that direction? seems like a structure littered with opportunities for spiffs.