Are we worth it?
An expensive acquaintance
In early 2006, I was at the wedding of a good friend in the home town of
his bride outside Chicago. At the reception I sat next to the bride’s charm-
ing aunt, Mrs Straw. Mrs Straw had lived in the small town all her life and
her husband was a couple of years from retiring from the local sub-supplier
for one of the Detroit auto companies. She had not worked for a decade.
Soon the conversation turned to what I did for a living.
‘I work at an investment management company,’ I said.
‘Oh, interesting. Like a mutual fund?’ she asked.
‘Sort of. It’s called a hedge fund but it is quite similar in many ways.’
‘I know what a hedge fund is,’ she said, slightly offended that I had
assumed she would not. We’re invested in them through my husband’s
pension plan at the plant. They’re great. He is so close to retiring and the
pension manager told the folks that hedge funds were like a guarantee
against markets going down.’
‘Sort of like a sure thing,’ I suggested. ‘Which funds are you invested
with?’
‘I think they invest in a couple of what are called funds of funds who are
then able to pick the best hedge funds,’ she said.
‘That’s great,’ I said, before moving the conversation on to other things.
The brother of the groom, who had given up investment banking earlier
that year, had observed our conversation from across the table. ‘Dude,’ he
said later, everyone’s in hedge funds these days. It’s the way of saying “I
19
158 On t he front line
am a sophisticated investor” even if many people don’t have a clue what
hedge funds actually do.’
The following morning, as I was waiting for Puk to get ready for the
post-wedding brunch, I absentmindedly
jotted down some figures on the notepad
by the bed while watching some basket-
ball highlights. These were numbers I had
known about for a long time, but never
really focused on or added up from the
perspective of the ultimate end inves-
tor. They went like this: pension-fund
adviser 0.25 per cent, pension-fund fees
and expenses 0.75 per cent, fund-of-funds
management fee 1 per cent, and so on.
‘There are a lot of people who need to get paid here before my friends
from last night see a penny,’ I thought, increasingly aware of the staggering
aggregation of fees. I would cross out many of the fee levels and make them
lower so that the aggregate fees would be more reasonable.
‘Surely external pension fund advisers only charge 0.15 per cent per
year,’ I would mutter to myself.
Still, my conclusions were troubling, and I began to think the only way
the numbers made sense for them would be if the hedge funds all per-
formed brilliantly every year which clearly wasn’t the case. Typically, Mr
Straw’s pension fund would have its own set of expenses and fees on top
of the external adviser often hired to assess what to do with the hedge-
fund allocation. With the help of this adviser, Mr Straw’s pension fund
would typically make an allocation to one or more of the larger funds of
funds, depending on their risk appetite and their views on which fund of
funds showed greatest promise. The fund of funds selected would then go
about its work and decide which hedge fund to invest in, including funds
like Holte Capital. That is a lot of mouths to feed, particularly when you
consider that the hedge funds, on top of their typical fees, have expenses
associated with trading and administration. Below is a summary of all the
annual fees and expenses Mr Straw could incur before seeing a return from
his hedge-fund investment:
These were numbers I had
known about for a long
time, but never really
focused on or added up
from the perspective of the
ultimate end investor.

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