Post New

I ran across a money manager, Tom Hayes, who charges a performance based fee. This is something I'd not normally consider, but I have been looking into it.
I'm familiar with the 1% AUM model, which I don't like, and heard of the "2 and 20" fee structure as well.
Hayes charges 25% (for my account size, lower for larger) on profits above high water mark, and no management fee.

It seems patently outlandish on the surface. But working the numbers, it does not seem like such an advisor needs to generate huge outperformance.
Something like 3% annually more than (you could do, the SP500 will do, a 1% AUM advisor would do) would put you far ahead even after those fees.

I understand the argument that says, just stick it in an SP500 index fund, no one does better than that.
Except it does look likely that with the very high valuations currently, it could be a bad time to park your funds in an index.
And I suspect that there are certainly money managers who can deliver "alpha", so to speak.

I had not heard of Hayes until he randomly showed up on a video I was watching.
From what I saw of his philosophy (Buffet-like, buying good businesses when they are out of favor), it resonated with me.
OTOH, he was involved in some LIBOR scandal in the UK and served prison time, lol, so who would let someone like that manage any of your money?

Interested in any thoughts ...



Mark

25% of profits above some sort of hurdle rate (maybe 6%?) would be a lot better : )

Though recommending a hurdle rate is a bit disingenuous, as I didn't have one. In case anybody is interested, I used to be a money manager. My fees went like this:
* If profit to client is 0-15% for the year, fees are 12% of profit.
* If profit to client is over 15% for the year, fees on the portion above 15%/year are 7% of profit.
* If profit to client for the year is negative, management firm pays client 2% of the loss, with unlimited personal guarantee from the owner of the firm (me).

The reason for the middle step is to dampen the temptation for the investment manager to take big risks to try to knock it out of the park one year, or (more subtly) seeking returns that alternate very good and very bad years. Step 3 works even better to focus the mind.

Clients managed low double digits after fees in each of 2008 and 2009 while fully hedged, which I'd call a win. The biggest client was a public company who had a pile of cash sitting around after having sold some subsidiaries. They made me use an insanely high fee broker, da bums--returns would have been 3% higher at a normal place.

Jim

It was interesting to see your fee structure, thanks for posting!
while fully hedged is also very interesting. Could you share that? If it's your 'secret sauce' it's quite understandable if you wish to remain mum on that.

But working the numbers, it does not seem like such an advisor needs to generate huge outperformance.
Something like 3% annually more than (you could do, the SP500 will do, a 1% AUM advisor would do) would put you far ahead even after those fees.

The statistics are against it. It could be that this guy is in the 1% who beat the market long term. But unlikely.

Also, they win even if they do not outperform. They get 25% of any gain.

When I retired I put a mid-6-figure 401K with Fisher Investments. About 5 years later that account was not doing any better than the investments I was doing on my own. No reason to pay them $10,000 a year to do the same as me. (Yes, both accounts beat the S&P500.)


charges 25% on profits above high water mark,

What is his high water mark? 3% above the S&P500? 10%? 1%?
Scratch that. They just don't charge the fee if the account is below a previous quarter's amount.

I remember what happened with taxes in the 1999-2000's tech boom and bust. People make a huge capital gain one year and paid a boatload of taxes. Then the next year they lost it all in the bust.
In 2 years they were back to even, or less than even, but the IRS didn't refund them any of the money.


From what I saw of his philosophy (Buffet-like, buying good businesses when they are out of favor), it resonated with me.
"Tom’s nickname on Wall Street is “Turnaround Tom” as he specializes in buying good businesses at great prices."

Have you ever heard anybody say their investment philosophy is to buy bad businesses? No, everybody says they are going to buy winners.
As Mike Tyson said, "Everybody has a plan, until they get punched in the mouth."


I always have a math problem with a small AUM fee.
How much personal attention do you think you are going to get for $10,00 a year? He'd need thousands of such clients to make it worthwhile.
{Ah, AUM $1B. So they do have a lot of clients.}

Something like 3% annually more than (you could do, the SP500 will do) would put you far ahead even after those fees.

If the S&P500 does 10% and he does 13%, he gets 25% of the 13%, leaving you with net 7.5%.
How many of these people consistently beat the S&P500 by more than 3%?



Is it this guy? "Thomas J. Hayes is the Founder, Chairman, and Managing Member of Great Hill Capital, LLC, a New York City-based long/short equity money manager and hedge fund."
Yes.
"Hayes frequently appears as a financial commentator on networks like Fox Business and the NYSE, where he provides analysis on market rotations, interest rates, and stock selection. His core investment philosophy focuses on assessing both short-term market momentum and long-term fundamentals."

So he's like Jim Cramer?

The brochure says 25% of the gains (not above a certain cutoff, of *all* gains) per quarter. No fee if the account is less than the highest quarterly value.

Worse, if they UNDERperform the S&P500 but still make a gain, you pay a fee on the gain. It would gall me no end to get charged a fee on a $5,000 gain when SPY would have given me a $10,000 gain.

"($1,000,000 to $5M) clients will pay an annual fee of 0.00% of assets under management along with
a 25% performance fee based on capital appreciation. If the client's portfolio rises in value, the client will
pay 25% on that increase in value, but if the portfolio drops in value, the client will
not incur a new performance fee until the portfolio reaches the (highest quarterly) value."

I was going to pencil some figures, but it got complicated real fast.
$1M account make 10%/yr. All in Q1, that's $25,000 fee then $0 for the next 3 quarters.
If 2.5% in 4 quarters, that's $6,250 per quarter. Maybe.
What's the base after the first quarter?
Is it $1M +$25,000 - $6250 = $1,018,750?
Next quarter fee will be $6,367.

If there is now a 10% loss, you don't pay any fees until the account recovers, but you are still out the fees they took each quarter.
For them it's "Head we win, tails we don't lose."

They do highlight some details in the brochure. "You will pay fees and costs whether you make or lose money on your investments. Fees and costs will reduce any amount of money you make on your investments over time. "

Ah, " Additionally, you will pay transaction fees, if applicable, when we buy or sell an
investment for your account."

When I was at Fisher they put the account with a full-service broker, who charged full-service commissions. Not the $5 I paid at BrownCo. Something like $65 per trade. Not $0 that the likes of Schwab & Vanguard charge.

---------
Sorry for going on so long. Goggle one little thing and you are suddenly down the rabbit hole.

In case anybody is interested, I used to be a money manager. My fees went like this:

Thanks very much, I was curious about how you ran your fund. Sure you don't want to re-open it? :)
Your fees were definitely more favorable to the customer.

I'm assuming that you were, indeed, able to "beat the market" while you were running the fund.
I'd like to hear about that, because in addition to concerns about fees, one has to wonder if a given manager really can deliver value over time.
It's really easy for us to just say "that's impossible" but I do believe there are wise folks out there who can do very well.

Hayes reports these returns net of all fees:
2023 - 67% (SP500 26%) gap +41%
2024 - 18% (SP500 25%) gap -8%
2025 - 46% (SP500 18%) gap +28%

It looks like his fund only registered as an investment advisory firm in 2023, so apparently that's his only track record.
Aside from what he made for UBS anyway.


Mark

while fully hedged is also very interesting. Could you share that? If it's your 'secret sauce' it's quite understandable if you wish to remain mum on that.

No big mystery.

I have a lot of different decent investment strategies, so for this particularly client, who REALLY wanted to avoid losing money in any given fiscal year, I picked what seemed to offer decent returns with decent hedging. The hedging was sufficient to protect almost all of the capital almost all of the time.

The largest strategy was, more or less, the one laid out in this book: https://www.goodreads.com/book/show/1797544.Put_Op...
In short: write a diversified portfolio of cash-backed puts, usually around a year out. Use some of that cash to buy puts at a lower level against an index that correlates passably well with the portfolio. The key bit: the maximum income is known in advance, so if it isn't attractive this year, simply don't do it this year.

Since this combo is hedged, a pinch of leverage is quite feasible, though I didn't use any for them. In reality the calculated maximum profit is an underestimate, because when a position makes most of its maximum return in much less than the maximum time, you can close it and replace it with something else with a higher prospective rate on offer. I usually did a round of trades like that every couple of months.

I took that strategy and adapted it to my own use, changing it a fair bit. Since then I've written over 100k contracts. It keeps me in beer and pizza.

A lot of people think "options! yikes! risk!", but if you study the actual strategy it's not like that. This strategy is hedged. The only way you can lose a non-trivial amount with this specific strategy is if a whole lot of your individual tickers really tank, but the index you picked doesn't drop, which is somewhere between rare and impossible. Besides, rarely noticed by anyone is that even when unhedged, writing a cash-backed put is always safer than simply buying the same stock, assuming you don't use the leverage on offer. Yet lots of people buy stocks all the time who would never consider the "risky" practice of using lower-risk options.

Jim

Thanks very much, I was curious about how you ran your fund. Sure you don't want to re-open it? :)
Your fees were definitely more favorable to the customer.

Those were the fees for private client managed portfolios. I also had a 2-and-20 registered hedge fund. (it was about the last stretch a small fund could get away with that!)

I'm assuming that you were, indeed, able to "beat the market" while you were running the fund.

One client lost a fair percentage of his money in my hedge fund. I started the fund shortly before the credit crunch, so a full redemption request around the middle of 2009 will do that. But otherwise folks made money. Returns were not always market beating, but that's not what all clients wanted: some folks prefer the trade-off of a narrower range of outcomes. There are lots of folks would be very happy with (random example) 11% net of fees, plus or minus 8% in any given year.

I definitely won't do that business again, as I learned that it is a *terrible* way to make money. It's all about sales to get more AUM, almost nothing about the quality of the investment management. It's also spectacularly stressful if you actually care about how the clients are doing. And don't even get me started on the useless regulatory paperwork or overpriced service providers.

Jim

How many of these people consistently beat the S&P500 by more than 3%?

"Consistently" is the hard part; and I suspect it is mainly what people want and expect from professional management, even if they don't realize it. Given that anybody can get a market return, failing to do better means you're paying for something other than total return.

Fair enough. But it's worth considering that it's the "something other" that's expensive.

Baltassar

so if it isn't attractive this year, simply don't do it this year
I really liked that strategy when it was discussed in some depth (mostly provided by you) on the BRK board.
But it seemed like "this year" wasn't a great year to get an attractive return, nor the following "this year", ... and so I snoozed it.

so if it isn't attractive this year, simply don't do it this year
...
I really liked that strategy when it was discussed in some depth (mostly provided by you) on the BRK board.
But it seemed like "this year" wasn't a great year to get an attractive return, nor the following "this year", ... and so I snoozed it.

As a crude rule of thumb, if VIX is over 25 it's usually easy to find great picks more or less at random, but when it's under 20 you have to be a bit more judicious.

The main thing I changed in the strategy was switching from a diversified (not too closely examined) portfolio to a short set of tickers that I knew reasonably well well.

The thing is, a cash-backed put outperforms the stock if the stock falls a lot, falls a little, breaks even, or rises a little. It underperforms if the stock rises a lot in the option's time interval. My insight is that very few stocks rise a lot in a lot of intervals one after the other, so if you do *repeated* cash backed puts on the same ticker over time you do pretty well. It has to be a firm you trust that the actual value isn't falling, and it isn't overvalued. It works spectacularly on a stock that is very out of fashion but which you believe is supported by value--lots of pessimism means high premiums, and a low and flat stock price, so you get the high premiums sometimes for years at a time. For example, Sears went bankrupt, but I made an IRR of 28% writing puts against it because it took so darned long to fail.

With that in mind, I only had to stop doing put writing on rare occasion when the option premiums are super low on everything.

Jim

rayvt: If the S&P500 does 10% and he does 13%, he gets 25% of the 13%, leaving you with net 7.5%.
How many of these people consistently beat the S&P500 by more than 3%?

If he gets 25% of 13%, you are left with 9.75%, not 7.5%. But yes, it does get rather tedious to figure out the details.

I made the following table to try to compare a 1% AUM advisor matching the SP500 to a Fee Advisor delivering 3% more than the SP500.
The SP500 returns are invented for the next 10 years, and at 5% are on the low side since that's what folks expect.
The Fee advisor delivers 8% annual return for the next 10 years, but with larger variation in returns and not that correlated to the SP500.

Portfolio is initialized at $1M and the fee advisor gets paid 25% of the gains (above previous year-end high) at the end of each year.
The fee advisor earns nothing if the portfolio value at the end of a given year is lower than any prior year-end high.
(That is, if the advisor delivers negative returns, he earns no fees).

      SP500             SP500 Value  1% AUM Adv  1% AUM    Fee Adv  Fee Adv     Fee Adv     Fee Adv
Year  Return            Raw  Value   Net Value   Fee $     Return   Raw  Value  Net Value   Fee $
1     14%               $1,140,000   $1,128,600  $11,400   26%      $1,260,000  $1,195,000  $65,000
2     -8%               $1,048,800   $1,027,929  $10,383   22%      $1,537,200  $1,392,175  $65,725
3     25%               $1,311,000   $1,272,062  $12,849   -15%     $1,306,620  $1,183,349  0
4     5%                $1,376,550   $1,322,308  $13,357   -7%      $1,215,157  $1,100,514  0
5     -4%               $1,321,488   $1,256,722  $12,694   36%      $1,652,613  $1,470,568  $26,131
6     12%               $1,480,067   $1,393,453  $14,075   4%       $1,718,717  $1,514,685  $14,706
7     18%               $1,746,479   $1,627,832  $16,443   -27%     $1,254,664  $1,105,720  0
8     -25%              $1,309,859   $1,208,665  $12,209   50%      $1,881,996  $1,622,607  $35,974
9     16%               $1,519,436   $1,388,031  $14,021   12%      $2,107,835  $1,768,641  $48,678
10    8%                $1,640,991   $1,484,083  $14,991   5%       $2,213,227  $1,834,965  $22,108
 
      Final Value       $1,640,991   $1,484,083                     $2,213,227  $1,834,965
      Total Fees        $0                       $132,421                                   $278,322
      Loss Due to Fees  $0           $156,908                       0           $378,261
      Total Return      64%          48%                            121%        83%
      CAGR              5.08%        4.03%                          8.27%       6.26%

With this scenario, the 8.27% raw return that the fee advisor delivers is reduced to 6.26%, slightly higher than the SP500 return with no fees.
And comfortably higher than the 1% AUM advisor who is just indexing.

Assuming I don't have mistakes in there, this argues that the 25% fee may not be as onerous as it seems.
And this "0 and 25" fee schedule is probably better than "2 and 20", unless the latter has a hurdle rate.


Mark

Post New

Macroeconomic Trends & Risks FAQ

---

Contact Shrewd'm
Contact the developer of these message boards.