From a friend at Barclays, this:
There was a very interesting article in the Telegraph which uses Buffett’s record to show just how unfair the typical “2 and 20” is to fund investors.
Buffett of course ran a partnership where he received no performance fees until exceeding a minimum threshold. If he didn’t perform, he didn’t get paid. The “2 and 20” of today ensures that the hedge fund manager always gets paid and paid extremely well if he/she performs.
Here is the article, the impact on amount of wealth compounded is staggering:
“If you think the row about fund management charges is a tedious technicality then prepare for a rude awakening.Terry Smith is the latest outspoken multi-millionaire to lob a hand grenade into this debate which will shake the City to its foundations and could bring several institutions crashing down.
He claims investors are left with less than a tenth of the total returns some fund managers receive – and usesWarren Buffett’s famous Berkshire Hathaway fund to illustrate the impact charges can have on long-term returns. Mr Smith says he is “not so much shocked as flabbergasted by the number of people who do not realise the impact of these performance fee structures”.
Taking typical hedge fund fees as an example – but widening his attack to performance fees charged by rising numbers of unit trusts and open-ended investment companies (OEICs) – Mr Smith said: “”As you are aware,Warren Buffett has produced a stellar investment performance over the past 45 years, compounding returns at 20.46 per cent per annum. If you had invested $1,000 in the shares of Berkshire Hathaway when Buffett began running it in 1965, by the end of 2009 your investment would have been worth $4.8m.
“However, if instead of running Berkshire Hathaway as a company in which he co-invests with you, Buffett had set it up as a hedge fund and charged 2 per cent of the value of the funds as an annual fee plus 20 per cent of any gains, of that $4.8m, $4.4m would belong to him as manager and only $400,000 would belong to you, the investor. And this is the result you would get if your hedge fund manager had equalled Warren Buffett’s performance. Believe me, he or she won’t.
“Two and twenty does not work. That does not mean that 1.5 per cent and 15 per cent is OK, or even 1 per cent and 10 per cent. Performance fees do not work. They extract too much of the return and encourage risky behaviour.”