November 03, 2006
Do We Need Jugglers Or Managers?
Is your money manager ignoring you? It is a possibility if your manager is one of those guys who are today juggling multiple roles. These managers handle everything from plain-vanilla mutual funds for small-time investors to hedge funds for wealthy individuals and institutional investors.
There is a fear that such a trend could lead managers to favor hedge fund investors. It is obvious isn’t it? These are the guys with the deep pockets and they pay much more than a mutual fund investor can or should. While some experts believe that there is no harm in such management, I personally have my doubts. I mean how can anybody be impartial when there is such a huge difference in the fee structure?
Hedge funds usually charge a certain percentage as management fees. This comes to around 1 2 percent. In addition to this, there is a 20 percent performance-based fee. In contrast to this, an average domestic stock mutual fund charges a management fee of roughly 1.5 percent. For any of those juggling managers, paying more attention to the hedge funds would be natural. The hefty performance-based fees are definitely a great incentive. So what exactly could they do to increase hedge fund returns? They could allocate their best investment opportunities to hedge funds.
The flip side of this argument is that good managers need an incentive to stick on with mutual funds. It is definitely a fact that in the recent past, many managers left mutual-fund firms for the bigger paychecks and lighter regulation of the hedge fund world. So, if you have a good manager then it makes sense to hand over the carrot of hedge fund fees so they manage mutual funds also. Not a bad argument.
But I think we are kidding ourselves if we say these managers are gonna be fair to mutual funds. They left the mutual fund industry because of low fees. So what’s stopping them from ignoring their mutual fund portfolio while juggling as well? And you know what all this makes me think? If such managers got something better than hedge funds, wouldn’t they ignore us hedge fund investors as well? I don’t know if I’m gonna be comfortable with such a guy. How about you?
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