Hedge Fund Connection
The Hedge Fund Connection | Why They Work
Mark Cuban recently published a post on what is currently wrong with how hedge funds operate. In short he believes that hedge funds are not setup to benefit investors because they are paid on an annual basis where as investors are looking for long term 3, 5 and 7 year returns. to read his full post please click here.
Here is a quote from the article: "Those who give money to hedge funds rarely if ever have a 1 year investment term. In fact, the contracts for investment do everything possible to lock up your money for as long as possible. vs. Hedge Fund Managers pay themselves on an annual basis.
That is a huge disconnect and there in lies the rub. While it is true that the managers are paid on a performance basis (plus their 2pct of assets) and some even have clawback provisions, that is not enough. If a fund can get big enough, all they have to do is max out in a single year and the managers are set for life. They put hundreds of millions of dollars EACH in their pocket."
I disagree with his assessment on many levels. Here is why:
Hedge Funds align their interests with investors more closely than mutual funds and corporations. Hedge funds earn their large profits by taking a percentage of the profits generated for their investors. Why aren't CEOs, mutual fund managers and ETF managers compensated in this way? Why don't corporate CEOs have high water marks written into their compensation plans? I think that hedge funds are the answer to the broad misalignment of interests in the marketplace, not the problem.