The Hedge Fund Connection | Mark Cuban

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.

Related to: The Hedge Fund Connection | Why Hedge Funds Make Sense

Tags: Mark Cuban, Hedge Fund Connection, Why Hedge Funds Work, Mark Cuban on Hedge Funds, Hedge Fund Blog Post by Mark Cuban, hedge funds, hedge fund, stock market, investments, stocks


Anonymous said...

They he should negotiate a different deal or find somewhere else to invest. Some might argue that's he was overpaid for what he really delivered.

Richard Wilson said...

Mark Cuban is overpaid or the hedge fund managers are?

Anonymous said...

The issue Cuban proposes is not in their watermarks, but instead the discrepancy between the HF manager's return on investment and that of his investors. If a manager can make a killing in one year on 22% in fees, and lose the next 3 years only forgoing his fees and not his own personal investment (and still make 2% of however many million or billion they control) then they are still not as closely tied to their investors needs as they should be. The structure of pay in a hedge fund promotes risky investment in both up and down years. If you lose big you lose only customers once they finally have the chance to withdraw their money, if you win you make spectacular rewards for your risky tendencies.

Were the timeframe designed the same for both the manager and investor, fund managers would have to try to maintain positive returns for their investors for the long run of their investment, not just for one or two years.

Of course, HF investors are knowledgeable investors that understand the difference in time horizon and the risk involved in such an investment. By this measure, HF managers should do as they please. Supply and Demand would ultimately change the rules if they became no longer desirable investments.


Anonymous said...

This idiot sold a company with 100 million in revenues for 5 buillion. He should be hiding out in another country. This arrogant idiot thinks its ok to trade on info from a ceo. Now he thinks its a Bush conspiracy to get him. Wow hes nuts.

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