Tad Borek <borekfm[at]pacbell.net> wrote:


- quote -

The hedge fund universe is far too big to paint with a single brush. (How's
that for mixing a metaphor?). The media is full of statements that start out
"Hedge funds..." and are almost always wrong because hedge funds are as distinct
and diverse as people. You have to take both as individuals.

The recent explosion of hedge funds pretty much guarantees that a large number
of hedge funds operate by Tad's formula. The same can be said for mutual funds.

On the other hand, I know for a fact that there are hedge funds out there doing
good things. Just like mutual funds. The trick in both cases is finding the
good ones a priori.

I think it is significantly harder to find good hedge funds for a number of
reasons. First, the lack of regulation opens up the range of investment
strategies and reduces the disclosure. (I am not arguing for regulation, just
stating the result). Second, few hedge funds have long track records. Finally,
I don't know of a Morningstar for hedge funds. Because they are only open to
accredited investors and mostly small, there are few sources for broad coverage
of the hedge fund universe.

-- Doug

Douglas Johnson wrote:
- quote -


Bingo! I think that's at the top of the list of problems w/this. It's
possible to do that without pushing it so far that you're liable to the
"non-winning" clients.

My view is that hedge funds more or less operate in this realm. The bad
ones fail/fold, the good ones retain/add assets. Run forward for one
year; lather, rinse, repeat...how many of today's hedge funds will be
around in 2010?

-Tad

"Ralf" <xstream[at]highstream.net> wrote:

- quote -

If this were legal and I was unethical, I could get rich.

I set myself up as such an advisor. I get a bunch of clients and invest each
client in a different high risk strategy. Half go up and I get my fee. Half go
down and I lose nothing. Of course, I use the "up" clients as my references.

-- Doug

Don <dwzimm[at]telus.net> wrote:

- quote -

Well, the real problematic part is that return and risk are associated.
There are ways to generate a likelihood of huge gains by taking huge
risks. Under your compensation model, when things go well, the manager
gets a huge windfall. When they don't, they aren't paid, but that isn't
much worse (for the manager) than what would happen if they were more
prudent. But it could be a *lot* worse for the client.

There are models of investment that will do much better than a typical
market basket of stocks *most of the time*, but which carry risks
unacceptable to most investors for large portions of their portfolio
(margin, futures, options, etc.).

I guess if you take a long enough view on calculating the payment you
can eliminate that, but it might be tough to find an advisor willing to
wait 10 years to know what they will be paid.


Michael

"BMS" <mcfarland[at]yahoo.com> wrote in message
news:RvWdnRZV1Y3dO4zeRVn-hA[at]comcast.com...
- quote -

Yes, I see what you are saying; short term gains do not necessarily turn
into long term gains. Probably it would be too complicated to decide upon a
time period during which an advisor would be entitled to a percentage of any
gain and how to penalize losses or subtract a percentage of losses that
occur after that point. It doesn't seem practical. But it occurred to me
there is another reason why incentive fees would not be practical. There are
many long periods of market declines, some lasting years, and in these
periods gains do not happen too often in anybody's portfolio. So during
these periods advisors would be out of business if incentive based fees were
the rule. In these down periods I suppose the main job of an advisor is not
making gains but is preventing or minimizing losses.

The problem is if the advisor is paid for gains today and the owner is
looking for growth tomorrow, their interests are not aligned.

That's why assets managed based fees are allowed and incentive based fees
are not.

Churning would be the result of manufacturing a gain, which would be good
for the advisor but not necessarily for the client.

"Don" <dwzimm[at]telus.net> wrote in message
news:Ls5Qe.157617$wr.20267[at]clgrps12...
- quote -

"BMS" <mcfarland[at]yahoo.com> wrote in message
news:IsOdnf9hXNWTrJLeRVn-oA[at]comcast.com...

- quote -

I am surely missing something. The incentive for churning would be great if
the advisor's fee depended on the number of transactions. But if the fee
were a percentage of the gain, as the OP suggested, there would be no
incentive for churning unless the advisor really believed it would result in
a gain.

In article <IsOdnf9hXNWTrJLeRVn-oA[at]comcast.com> , "BMS" <mcfarland[at]yahoo.com> wrote:
- quote -

Can you elaborate on this ? If my choices are no gain, or gain as a result of
churning, I know which I would choose (assuming a net to net comparison, after
fees, etc).

BMS wrote:
- quote -

BMS is right. There are some exceptions for what are called "accredited
investors" (rich folk) but I think it's a problematic way to pay a money
manager.

-Tad

No

NASD, SEC rules prohibit such a relationship. The incentive for churning to
create a gain is too great.

"Ralf" <xstream[at]highstream.net> wrote in message
news:11grsmedboueid6[at]corp.supernews.com...
- quote -

I am looking for a financial advisor who will base his fee on a percentage of gains in my portfolio - if there is no gain, there is
no fee! Does such an advisor/company exist? Thanks RG

--




The novelist George Eliot once said that "it is never too late to become what you might have been."