Thursday, May 03, 2007

2 and 20 has now become 3 and 50 !

Warren Buffet called them “2 and 20 managers” [Hedge Funds that charge 2% of funds managed as fees and 20% of profits as carry] and said this much – “when a man with the money meets the man with the experience, the man with the experience ends up with the money and the man with the money ends up with the experience”.

Call it the Groucho Marx problem: Of late Investors trying to put money into hedge funds frequently find that the managers they want do not want their cash.

Just as Groucho complained that he would not join any club that would accept him as a member, even very wealthy investors can find themselves faced only with hedge funds they do not want to invest with. As a result, some investors are resorting to devious tactics to get stakes in the best hedge funds.

Perhaps Mr.Buffet has been naïve to the latest phenomenon of mismatch of supply and demand that has given rise to the tendency of successful fund managers to jack up their fees — to 3% a year and 50% of profit in the case of SAC Capital — and impose long lock-ins, preventing customers from getting their money back for as long as five years. He might now call them “3 and 50 managers” – so long as they stick with those numbers.

Many of the industry's biggest names — Steven Cohen of SAC Capital, Paul Tudor Jones of Tudor Investment, Louis Bacon of Moore Capital, Steve Mandel of Lone Pine Capital and others — do not need to expand existing funds further and often believe that more cash would hurt their returns. Even when they find they have the capacity to take more money, they typically turn to their existing investors first.

But investors who know the tricks of the industry might be able to find cracks in the door. The most obvious way to get into a closed hedge fund might appeal to Groucho, but most people would shy away from it: Simply send your money to the fund's depository bank and rely on the fund's automatically issuing units, as LAtimes reports here.
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