Making your commissions
Are you being serviced?
Once Holte Capital had grown to a couple of hundred million dollars
in assets under management, the world of service providers and financial
counterparties started to take note of us. The implication was clear: the
more money you had invested, the more fees and attention you got.
As we approached our peak of around $1 billion in invested capital, we
were receiving a lot of love from brokers. This was sadly not because of
our good looks and charming characters but because of the fees we gen-
erated for them. Assuming that we turned over (the hedge-fund term is
‘churned’) our portfolio 2.5 times in a year we would trade a total volume
of $2.5 billion. About 20 per cent of
this volume was cheaply traded futures,
but the rest was stocks and bonds. As we
paid approximately 8 basis points (0.08
per cent) in trade commission, in trading
volume alone, we generated about $1.6
million annually in commissions. This is
not to say that brokerage is easy money: far
from it. It is a fiercely competitive business
in which you eat only what you kill and
even a near-term failure can get you fired.
If a medium-sized firm
like Holte Capital can
generate $1.6 million in
trade commissions every
year, it becomes obvious
why the banks and
brokerage houses take you
to the Super Bowl.
150 On t he front line
Yet, if a medium-sized firm like Holte Capital can generate $1.6 million in
trade commissions every year, it becomes obvious why the banks and bro-
kerage houses take you to the Super Bowl. Considering that Holte was by
no means a large hedge fund, imagine the fierce competition to service and
entertain the $10-billion-plus hedge funds.
Annual trading costs
Invested capital 1,000.0 (in millions)
Churn 2.50X
Annual amount traded 2,500.0 (in millions)
Futures 20%
Non-futures amount 2,000.0
Trading costs 0.08%
Annual commissions 1.60 (in millions)
With the additional money brokers can make from knowing the trade
flows, market-making activity, swap-contract fees, stock-loan fees, dividend-
enhancement trades, and so on, it all adds up to a tidy amount from Holte
alone. With higher assets under management and the promise of greater
volume to trade, we were also able to reduce our commission rates.
The commission dollars did not bring us into the big leagues of massive
hot IPO (initial public offering) allocations or calls about the development
of new technologies from Mary Meeker, but in our little world they made a
big difference. We could now call analysts from all the research houses and
expect to have them walk us through their analysis and discuss companies
or industries for hours. Often you would hear the analyst looking you up
on the internal system before committing to talk to you.
In the early days, I often encountered analysts saying, ‘Actually, I have
another call, but will call you back’. Right. Or, more honestly, ‘I am sorry,
but our database here says you are not a big enough client for me to be
talking to you. Can I put you through to one of our sales people?’ Some
research analysts had clearly mastered the art of turning you down, while
others left a self-important hedge-fund manager feeling rejected and angry.
The game of how to get the most benefit from your commission dollars
was also played at the large conferences. Every year Morgan Stanley held a
very large TMT (telecom, media and technology) conference at the aptly
named Hotel Arts in Barcelona. The hotel’s large underground confer-
ence centre allowed six simultaneous large company presentations and still

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