Retail access to hedge funds is a hot topic in the news at the moment. So how do hedge funds work?
The dollars can be huge for a large fund with hot numbers: it works like this: take a $1 billion in assets fund and a 10% investment return last year. The fund management company would collect 2% of the $1 billion, which is $20 million. The 10% investment return on $1 billion would be $100 million, and 20% of that would be $20 million. After paying the fees, the new asset base would be $1.06 billion. The fund management company takes home $40 million dollars, some of which goes to pay operating expenses, while the investors in this example earn a net return of 6%. In the case of Fortress Investment Group (NYSE: FIG), for the nine months ended September 30, 2006, the last time period for which full details are available, the company earned $325 million in management and incentive fees on $29.9 billion in assets under management, an average rate of 1.4 percent. <">Blackstone Group LP, meanwhile, filed to go public on March 22. Although the company specializes in private equity investing, most of its partnerships are structured similarly to hedge funds, including the performance fee. Blackstone’s SEC documents show that the company earned $1.1 billion in management and advisory fees on $69.5 billion in assets under management, for a 1.6% average fee per dollar managed.
Franklin Resources (NYSE: BEN), the parent company of the Franklin Templeton funds, generated $831.9 million in fee revenue on $552.9 billion in assets at the end of 2006. This works out to 0.15% of assets under management, about a tenth of what Fortress and Blackstone collect.
Now according to a paper released this month by John Griffin and Jin Xu of the University of Texas at Austin, there is evidence that hedge fund managers are slightly better at picking stocks than mutual fund managers - on the order of 1.32% per year - but that difference disappears once the data are adjusted to remove the effects of the 1999-2000 tech stock bubble. Once the fees are taken into consideration, a plain-vanilla mutual fund looks pretty good with a TER of say 1.5%. And maybe a diverses basket of ETFs with average TERs of .50% looks even better?
This entry was posted
on Wednesday, March 28th, 2007 at 5:57 pm and is filed under Main.
You can follow any responses to this entry through the RSS 2.0 feed.
Both comments and pings are currently closed.
So how do hedge funds work?
The dollars can be huge for a large fund with hot numbers: it works like this: take a $1 billion in assets fund and a 10% investment return last year. The fund management company would collect 2% of the $1 billion, which is $20 million. The 10% investment return on $1 billion would be $100 million, and 20% of that would be $20 million. After paying the fees, the new asset base would be $1.06 billion. The fund management company takes home $40 million dollars, some of which goes to pay operating expenses, while the investors in this example earn a net return of 6%. In the case of Fortress Investment Group (NYSE: FIG), for the nine months ended September 30, 2006, the last time period for which full details are available, the company earned $325 million in management and incentive fees on $29.9 billion in assets under management, an average rate of 1.4 percent. <">Blackstone Group LP, meanwhile, filed to go public on March 22. Although the company specializes in private equity investing, most of its partnerships are structured similarly to hedge funds, including the performance fee. Blackstone’s SEC documents show that the company earned $1.1 billion in management and advisory fees on $69.5 billion in assets under management, for a 1.6% average fee per dollar managed.
Franklin Resources (NYSE: BEN), the parent company of the Franklin Templeton funds, generated $831.9 million in fee revenue on $552.9 billion in assets at the end of 2006. This works out to 0.15% of assets under management, about a tenth of what Fortress and Blackstone collect.
Now according to a paper released this month by John Griffin and Jin Xu of the University of Texas at Austin, there is evidence that hedge fund managers are slightly better at picking stocks than mutual fund managers - on the order of 1.32% per year - but that difference disappears once the data are adjusted to remove the effects of the 1999-2000 tech stock bubble. Once the fees are taken into consideration, a plain-vanilla mutual fund looks pretty good with a TER of say 1.5%. And maybe a diverses basket of ETFs with average TERs of .50% looks even better?
This entry was posted
on Wednesday, March 28th, 2007 at 5:43 pm and is filed under Main.
You can follow any responses to this entry through the RSS 2.0 feed.
Responses are currently closed, but you can trackback from your own site.
