Comment by dcposch | Hacker News Reader

Comment by dcposch | Hacker News Reader

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i worked at a startup called addepar for several years, making software for asset managers.

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.

I think perhaps the worst thing about Addepar is the way it sells itself to prospective (inevitably young) employees: that's it's on a mission to "fix finance." While there are some operational inefficiencies to be alleviated in the wealth management performance reporting space, the savings from which might at some point be passed along to asset owners, the actual result of Addepar's work, at least in the short term, is much less grandiose. I would characterize Addepar's effects as enabling wealth managers to continue to capture more of this value as you point out, while also assuring tax-efficient inter-generational wealth transfer.

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.

I think your criticism of startups overselling themselves to college grads is fair.

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.

I think there are other wealth management-related startups that are actually changing the paradigm, e.g., Wealthfront, whereas (to the extent of my knowledge) Addepar is helping the incumbents in the space continue to capture fees in excess of their value add (your original point). Relative to other local firms, Addepar operates at an information asymmetry advantage - the finance and especially wealth management industry is less well understood by the average CMU SCS graduate than, say, the social media industry. I think Addepar exploits this.

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.

>> 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.

There is usually also a watermark to make it less one-sided. See here: http://www.investopedia.com/terms/h/highwatermark.asp

that is true, but running a martingale-ish strategy will often just set a new high water mark every year... until it doesn't.

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.

> why people agree to those terms is beyond me.

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.

I would assume minimum asset requirements largely exist because, if you want to raise a $100m dollars, collecting it in chunks of $5 or 10k is not a great idea.

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