Should Bernie Madoff Have Charged 1% or 2% Fees?

except that if you charged a 2% fee and reinvested half of that, you'd make more than if you just charged a 1% fee, for any time period.

As other commenters have pointed out, both here and on the blog itself, the blog post assumes that a dollar taken out in fees in 2010 is worth the same as a dollar taken out in 2160. Depending on how you want to look at that, it's either ignoring inflation or ignoring the possibility of investing the fees, or both.

If you start with the client's $300, deliver 10% return a year, take 1% in fees per year, reinvest the fees in your own fund, then after 150 years

  Client's fund: 123E+6
           Fees: 362E+6

Huh? How is it possible that the fees are more than the client's fund? It turns out that the fees Bernie puts in his own fund don't get hit with the 1% fee themselves, so they're getting a return of 10% per year instead of 9%. After about 75 years, that makes the fees fund come out ahead.

With 2% fees, the results after 150 years are

  Client:  31E+6
    Fees: 454E+6

I.e., Bernie makes more on a 2% fee than a 1% fee, reason is restored.

With a bit of luck, I haven't made a mistake. It'd be nice if someone confirmed or contradicted my numbers. Here's what I did:

  -module(bernie).
  -export([loop/5]).

  loop(Year, End_year, Capital, Fees, _Fee_percent) when Year == End_year ->
        io:fwrite("year: ~p Capital: ~g Fees: ~g\n", [Year, Capital, Fees]);
  loop(Year, End_year, Capital, Fees, Fee_percent) ->
        loop(Year + 1, End_year, Capital * (1.10 - Fee_percent), 
                Fees * 1.10 + Capital * Fee_percent, Fee_percent).

Edit: indented code to try and stop it from getting mangled.

Not relevant to real life. It reminds me of stories from Econ 102 that said if only the Dutch who purchased Manhattan had offered the Native Americans the opportunity to put their money into CDs at 3% they would have come out ahead even after 350 years. Really they should have demanded casino rights on the spot.

Now change years to months and leave the rate per period the same and maybe you have an analysis applicable to a startup. Now the fees are more like 12% v. 24% on return rates of 120%. And the time scale is about 12 years.

Nah, still too long for a startup.

This also fails to account for CPI which makes things way less impressive. Assuming 3% CPI it's ~$450K vs. ~$1.875M