Buffett Assails Money-Manager Fees as Berkshire Reports Profit Rise
wsj.com
wsj.com
addepar's a cool place, and i learned a ton there and made some good friends.
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that said, my overwhelming impression of asset managers is that most capture more value than they add. fee-bearing mutual funds, family offices, financial advisors, hedge funds: few are worth their fees.
hedge funds, with their standard two-and-twenty fee structure, are especially bad. you could hardly design worse-aligned incentives, short of outright betting against your own clients.
two-and-twenty means 2% of assets under management every year plus 20% of any profit and 0% of any loss. why people agree to those terms is beyond me.
for example, running a strategy similar to a martingale, a negative-EV fallacy when done in a casino, can be incredibly positive-EV when you're a hedge fund manager. it produces streaks of above-market returns, where you keep doubling your AUM and rake in the fees, for however long that lasts.
when the crash happens, the managers walk away unscathed.
if you're interested in an entertaining story that starkly illustrates this dynamic, check out Long Term Capital Management.
rich people are susceptible to the same herd/exclusivity psychology the rest of us are.
to those who don't know, fund management firms have plenty of sales people, except they're not called sales people, they're called VPs, managing directors, partners, etc. but their job is to sell their services and bring new assets (MONEY) under management. they do this through social interaction and posturing. a lot of these people don't even actually manage the money, they just outsource it to hedge funds and banks with high end management services. they're constantly being wined and dined by bankers and traders, people they claim to hate yet they keep shoveling money in their direction. hmm.
why else do you think they have "minimum" asset requirements? there's no logical reason to have one -- once your client's money is in your pocket you can shift it around from a single pool of capital no matter how big or small the transaction. which is basically what an ETF is. there's software to keep track of all the individual deposits and returns. the truth is they market that exclusivity and they sure as hell don't want to talk with anyone who doesn't have millions of dollars. i can't say i blame them.
one thing they all have in common is they all look down their noses at "retail" financial services. it's just a big social game played by very smart people, like venture capital.
There is usually also a watermark to make it less one-sided. See here: http://www.investopedia.com/terms/h/highwatermark.asp
hedge funds often make a lot more from the 2% than from the 20%. if you grow your AUM into the billions, charging 2% of that in yearly fees is incredibly lucrative. if you have a few years of above-market returns and good salesmanship, you can grow your AUM quickly.
when the streak ends, the clients lose way more than the managers, who mostly just lose reputation.
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personally, i'd only invest in low-fee passive funds like vanguard etfs, and active funds where the managers have a high fraction of their own personal capital in the fund.
This is perhaps a cynical and short-sighted view of Addepar (and I've been told as much by Addepar's management), but based on my experience in the investment management industry, I feel it's more true than false.
However, I don't know if Addepar is more guilty of this than any other local tech venture. It's an industry wide issue.
Just curious, did you previously work there? Your only HN submission was over a year ago, and it was an obscure news article about Addepar cutting sales staff:
https://news.ycombinator.com/submitted?id=bfrink
> While there are some operational inefficiencies to be alleviated in the wealth management performance reporting space
Addepar already does more than just "wealth management performance reporting".
And all successful startups, as far as I can tell, start by shipping something simpler and smaller than their ultimate vision.
Facebook started as Thefacebook. It was a PHP+MySQL site that had the names of your classmates, profile pics, and a Poke button.
Of course everyone starts smaller than their end state, but as far as I can tell, Addepar still focuses on client reporting. There's a lot of data aggregation, etc., that goes into that, but from their website: "Addepar gives you a competitive advantage. By eliminating the manual burden of aggregating your financial information, and making it easy to generate customized reports in just seconds, we free you up to spend more time designing and advising on client investment strategies." If there's more there, like portfolio construction/rebalancing, order generation and execution management, clearing and settlement, etc., it's not easy to apprehend from publicly available information.
Look, I think Addepar is amazingly beautiful software, exceedingly well executed (though it may be pearls before swine.) It also has tremendous hype (which is often seen as an unalloyed good in the Valley). Is it a viable business? Is it revolutionary, or is it a much-better executed Advent with the advantages of no legacy code- and userbase? I think those are interesting questions.
Okay, I've been publishing this advice for 20 years now, to the annoyance of any number of financial advisors:
http://arachnoid.com/equities_myths/
The WSJ dartboard contest makes the same point:
There is some good discussion of this on the Bogleheads forums.
(Disclaimer: IANAL)
When you use a Greasemonkey script or an adblocker, you're changing the way the data they send you is represented. Is it a requirement that it must be displayed only in Webkit/Gecko/Titan representations of that data?
If you hit a paywall and use the built in web tools to delete the offending divs or disable javascript for that site, are you violating their copyright? Do sites have a right to require you represent the data they send in a particular way?
>If you hit a paywall and use the built in web tools to delete the offending divs or disable javascript for that site, are you violating their copyright? Do sites have a right to require you represent the data they send in a particular way?
Generally, yes, doubly so if you persist after being "asked" to stop. You can also be found offending under the Computer Fraud and Abuse Act. Read the case law on this if you want to get pissed off.
There have been several cases on these matters, and the overwhelming majority of them have confirmed that such acts are illegal. Due to the structure of copyright law, the small quantity of victories are hard to generalize (fair use is an affirmative defense), and basically only happened because the judges didn't want to take the heat for shutting down Google.
A web page cannot be accessed without infringing copyright except insofar as the user displaying the page is entitled to either an explicit or implicit license. Without valid licensing, the copy of the web page that exists in your system's RAM has been repeatedly ruled to be infringing.
Using proxies and masking user agents are big no-nos and usually function as good evidence that infringement was willful, which means an entitlement to treble damages, plus the animosity of the court.
The long and short of it is that if you continue to attempt to access a site after you know they don't want you to access it, you have violated the CFAA and could go to federal prison for doing so. You've almost certainly also violated the Copyright Act. Even if you don't know they don't want you to access it, it's certainly doable to build a case along these lines.
Aaron Swartz was being prosecuted for exactly this. He had set up a computer to download publicly-funded research papers from a service that MIT had a subscription to. His crime was downloading content in a way that the service didn't like; as far as I know, there was no service disruption as a result of Swartz's activity (and even if there were, that should entail civil, not criminal, penalties). We all know how that turned out.
You can make anyone in the U.S. a felon-in-waiting by a) knowing they visit your site or otherwise access a computer system under your control; b) deciding you don't want them to visit anymore; and c) making some indication of this, explicit or not, through some channel that a judge will decide should've been good enough to inform the accessor that his access was no longer wanted. Banning their IP probably works just fine, and surely setting up a paywall that takes explicit action to circumvent would as well.
Our laws are not made for the digital era.
Big tech companies like the status quo because it gives them carte blanche to rip off and trounce smaller competitors, while judges give them the benefit of the doubt (Perfect 10 v. Amazon). The big guys use fancy, $1,000/hr law firms to intimidate people who would make their data portable, and if that doesn't scare you off, they proceed with the lawsuit, ask their friends in the government to proceed with the prosecution, and take both your financial and physical independence. And yes, this does happen. It happens daily.
The "network effect" and "chicken-and-egg syndrome" discussed with relation to online services exists solely because we've legislated them into place through these laws. The digital world is valuable because massive amounts of data can be replicated quickly and exactly. There is no reason that "network effects" would ever be a thing here (people would use tools that read data sources and products would compete based on the features of the data viewer, not based on who had which data), except that we've made it a thing so that it's easier for big companies to kill competitors.
I'm not a lawyer; this reflects my layman's understanding.
His logic is that large fees on top of what can be excruciating fees by PBs are a major drag on realized returns. And given beta is the average, gross of fees, of all the alpha, then it holds that a material drag on the average will cause most active managers to do worse than the market.
Buffett and Buffett charged jack shit. Again, extremely limited.
The important thing he was criticizing was the excruciating fees, I think.
[0] https://www.wsj.com/articles/daniel-loeb-criticizes-warren-b...
He was indeed an activist investor. But he was an activist investor for dirt cheap, doing the dirt cheap things. Same for the use of insurance float (the cheapest money around) for alternative investments (the cheapest ones he could get).
(you could definitely argue that 50 over the higher threshhold is very different tho)
Berkshire Hathaway has B-class shares available that only cost $170. Anyone can afford them. https://finance.yahoo.com/quote/BRK-B/?p=BRK-B
[0] http://www.valuewalk.com/2015/05/warren-buffett-partnership/
The best deal in history has been Berkshire Hathaway. He charges no fees, zilch, only a nominal salary ($100k iirc). If Warren had carried forward his incrediably investor friendly 0/25 deal he'd have ended up being far richer.