Last month, I wrote the following about the imminent demise of hedge fund fee structures:
“2 and 20” works fine when things are going well.
Not so much when things are going poorly. After all, who wants to pay someone 2% of AUM to lose money or to grossly underperform benchmarks? Not me. And while not everyone can win all of the time, when owning a simple HY ETF can get me 16% and owning SPY 14% both for comparatively nothing in fees, you’d better give me a damn good reason why I should pay you 2% up front.
I think that’s probably as straightforward as it gets when it comes to assessing what, to be quite honest, amounts to highway robbery.
Hedge funds have responded to investor criticism by adopting a more flexible approach when it comes to what they charge for their “services”, but a couple of more years like last year (when you could have made money virtually everywhere) and you can kiss the whole damn industry goodbye.
In any event, have a look at the following chart from Goldman which should tell you everything you need to know about why investors are increasingly skeptical about giving their money to “star” managers:
(Chart: Goldman, my additions)