In Search of the Perfect Investment

Fees. Fees and even more fees. The New York Times has a story this morning:

Hedge Funds Took Bad ’14 all the Way to the Bank

The story has a pull-out — “Just half of the top 10 funds outperformed the S&P 500”. The story begins

For investors in hedge funds, like big pension funds, 2014 was not a lucrative year. But for those who managed their money, the pay was spectacular.

The top 25 hedge fund managers reaped $11.62 billion in compensation in 2014, according to an annual ranking published on Tuesday by Institutional Investor’s Alpha magazine.

That collective payday came even as hedge funds, once high-octane money makers, returned on average low-single digits. In comparison, the benchmark Standard & Poor’s 500-stock index posted a gain of 13.68 percent last year when reinvested dividends were included.

 The story motivated me to look at three Vanguard funds I own:

VFIAX has fees of 0.05% a year:

ETF has fees of 0.10%:

VGIAX has fees of 0.26%.

Here’s the rest of the New York Times article:

Still, the men (no woman has ever made the cut) at the top of the hedge fund universe now run firms that are bigger than they have ever been. Their influence is growing beyond the industry and even beyond Wall Street. They lobby in Washington, donate to political campaigns nationwide, and can pick their advisers from a pool of former central bankers.

Topping the list is Kenneth C. Griffin, who started by trading convertible bonds out of his dormitory at Harvard. He took home $1.3 billion last year. James H. Simons, a former National Security Agency code breaker who makes billions of dollars every year from his hedge fund, Renaissance Technologies, earned $1.2 billion. And Raymond Dalio, who runs the world’s biggest hedge fund, Bridgewater Associates, with more than $170 billion in assets under management, reaped $1.1 billion.

In close fourth was William A. Ackman, who is known for making large and concentrated bets, and for being outspoken about them. Mr. Ackman earned $950 million in 2014.

The pay estimates are based on the value of each manager’s stake in his firm and the fees charged. Investors in hedge funds generally pay an annual management fee of 2 percent of the total assets under management and 20 percent of any profits.

For the average person, these sums are extraordinary. But the overall pay for top earners was down by hundreds of millions of dollars in 2014. These managers made just over half of the $21.15 billion earned by the top 25 in 2013.

Still, what makes such nine- and 10-figure paychecks remarkable for 2014 is that many of the top earners had mediocre performances at best. Only half of the top 10 earners recorded returns that exceeded that of the S.&.P 500.

For investors, 2014 was the sixth consecutive year that hedge funds have fallen short of stock market performance, returning only 3 percent on average, according to a composite index of 2,200 portfolios collected by HFR, a firm that tracks the industry. Hedge funds are lightly regulated private pools of capital open to institutional investors like pension funds, university endowments and wealthy investors.

Such large investors continue to shovel money into the $2.9 trillion hedge fund industry, desperate to make returns in an environment of near-zero interest rates. So far this year, $95 billion of new capital has flowed in.

In terms of performance, Mr. Ackman’s Pershing Square Capital and Mr. Griffin’s Citadel were standouts. Pershing Square’s two funds gained 36 percent and 40 percent, the best returns in the 2014 ranking. Citadel posted returns of 18 percent to investors in its flagship Kensington and Wellington funds. Both Mr. Ackman and Mr. Griffin declined to comment for this article.

At Renaissance, the best-performing equities fund was up 14.5 percent, and its institutional futures fund gained 7.4 percent. Mr. Simons’s wealth, however, is tied up in the firm’s secretive Medallion fund, which manages only employees’ money and has earned average annual returns of more than 30 percent over two decades.

Elsewhere, returns were more modest.

Mr. Dalio’s Bridgewater started the year strong, with well-placed bets on interest rates in Europe and the United States, but momentum slowed in the second half of the year. He made 3.6 percent and 8.7 percent in his two main Pure Alpha funds. Mr. Dalio’s spokesman declined to comment.

Some notable managers were missing from the Alpha list entirely. The billionaire financier John A. Paulson did not make the cut because his Paulson & Company hedge fund lost money in 2014. Mr. Paulson, an inveterate art collector whose office is lined with Alexander Calder watercolors, was the second-highest earner in 2013, reaping $2.3 billion. He declined to comment.

And some of the most prominent names on past Alpha lists are no longer counted, having converted their hedge funds into family offices, managing chiefly their own money. Among them are George Soros, Steven A. Cohen, Carl C. Icahn and Stanley Druckenmiller.

Computer scientists whose firms use quantitative strategies were among the top earners last year. Mr. Simons employs astronomers and physicists and uses computer programs to scan reams of data in search of patterns to make investments, for example.

David E. Shaw, whose $36 billion D. E. Shaw firm hires data scientists to build algorithms for trading, made $530 million in 2014. Mr. Shaw, who has a computer science Ph.D. from Stanford, is no longer involved with the daily management of D. E. Shaw’s investments. A spokesman for D. E. Shaw declined to comment.

In a year when managers complained about unnavigable markets, with the leading central banks keeping interest rates low, hedge funds that employed a variety of strategies fared better.

Israel A. Englander took home $900 million after his firm, Millennium, made returns of 12 percent in 2014. Based in New York, Millennium uses a platform model to invest with 170 individual managers who each use their own trading strategies. Mr. Englander does not charge a management fee. Instead, investors share the costs of running the firm.

The highest-earning managers have also emerged as leading political donors. For example, Mr. Griffin, whose $26 billion firm, Citadel, is based in Chicago, was the single largest backer for Rahm Emanuel’s successful second-term mayoral campaign, donating more than $1 million. (Last month, Citadel hired Ben S. Bernanke, the former Federal Reserve chairman, as a senior adviser.)

Mr. Simons, who stepped down from day-to-day management of his $25 billion firm, Renaissance, in 2010, has been a significant political supporter of the Democrats, donating $8.3 million in 2014 alone. A spokesman for Mr. Simons declined to comment.

Activist investors, once the scourge of corporate America because of their strategy of buying up large stakes in companies and then throwing their weight around with management, came out on top, too.

Larry Robbins, an activist investor who prefers to be called a “suggestivist,” made $570 million in 2014. He made a fortune for himself and his investors in 2013 after winning a proxy contest against Health Management Associates. Mr. Robbins has also made a windfall betting on health care stocks like Humana, Thermo Fischer Scientific, HCA Holdings and VCA. A spokesman declined to comment.

One group of hedge fund managers known as the Tiger Cubs also made the top of list. Protégés of Julian H. Robertson, they are named after his firm, Tiger Management.

One of them was O. Andreas Halvorsen, the founder of Viking Global Investors, who earned $450 million last year. A former Norwegian Navy SEAL, Mr. Halvorsen is fiercely competitive; he came in eighth for his division several years ago in an Ironman race that included swimming, running and cycling.

Chase Coleman made $425 million last year. His firm, Tiger Global Management, reported steady returns for investors. The Tiger Global fund reported gains of 16.9 percent and Tiger Global Long Opportunities of 15.5 percent. The firm also makes venture capital investments in start-ups. A spokeswoman for Mr. Coleman declined to comment.

He died in the gym on a freak accident. He’s worth over $1 billion. She’s COO of Facebook and a hugely successful author. They won’t be hurting.

MarketWatch did a piece. Click here. MarketWatch is a bit too obsessed with life insurance. More important (at least t to me) is transparency of record-keeping — knowing where everything is — and enough cash and/or easily liquifiable assets for two years of living expenses.

The end of the MarketWatch article is most interesting:

.. there are common mistakes people make after the death of a spouse. They include making decisions too quickly – like selling a home or a business, or quitting a job – adjusting to a more modest lifestyle by setting a strict monthly budget, relying on the financial advice of family and friends instead of seeking the help of an attorney or financial planner, according to a paper by Mark Colgan, Chief Executive of Montage Wealth Management in Pittsford, N.Y. You may need an estate planner rather than the accountant who helped with your taxes, for example, when enlisting professional help to deal with the death of a spouse.

When faced with big life-changing decisions, sometimes it’s better to do nothing at all. Writer and television personality Carole Radziwill, author of “What Remains: A Memoir of Fate, Friendship and Love,” and widow of Anthony Radziwill, who was the son of a European prince and nephew of President John F. Kennedy, said she made some major (and hasty) decisions after her husband died in 1999. “`I did everything wrong,” she told The Daily Mail in 2013. “I quit ABC, I sold our apartment; all the things they say don’t do, I did them.”

 L. A. sues Wells Fargo, alleging ‘unlawful and fraudulent conduct’

From the Los Angeles Times, yesterday,

Rigid sales quotas at Wells Fargo Bank have driven employees to open unauthorized accounts for customers, sticking them with bogus fees and damaging their credit, according to a city of Los Angeles lawsuit that echoes a New York Times investigation.

Echoes of sub-prime mortgages?

Favorite quote of the week:From Shark Tank:

Convince me that this isn’t the worst idea I’ve ever heard.

CarlyFiorina.org. If you visit this web site you will see:

Then lots more 🙁 until you scroll down and reach…

Fortunately she doesn’t have a snowball’s chance in hell. I’m not a Carly fan.

Fabulous funny film: Highly recommended.

Yet another scam. My phone rings. “We are calling about your computer. We are receiving error notifications.” All I have to do is download some of their brilliant repair software.

I can’t believe that people continue to fall for this obvious scam.

You got censored yesterday. Yesterday I ran this tasteless “joke,” which included the word “test**les. Half my readers got censored by their companies. In case you missed it, here it is again:

 Totally wonderful. Totally tasteless.

While sipping his tequila, a cowboy noticed a sizzling, scrumptious-looking platter being served at the next table. Not only did it look good, the aroma was wonderful.

“What is that you just served?” he asked the waiter.

“Ah Señor, you have excellent taste!” the waiter replied. “Those are called Cojones de Toro, bull’s test**es from the bull fight this morning . . . a delicacy!”

“What the heck, bring me an order.”

“I am so sorry Señor,” the waiter replied. “There is only one serving per day because there is only one bull fight each morning. If you come early and place your order, we will be sure to save you this delicacy.”

The next morning, the cowboy returned, placed his order, and that evening was served the one and only special delicacy of the day. After a few bites, and inspecting his platter, he called to the waiter. “These are delicious, but they are much, much smaller than the ones I saw you serve yesterday.”

The waiter shrugged his shoulders. “Si, Señor . . . sometimes the bull wins!”

 How handsome.

This is me this morning in my new $19 Zenni Optical ultra-light weight specs. That $19 included the frames and the lenses.

Zenni also does kids glasses, prescription sunglasses, etc. Zenni Optical’s excellent web site is here.