Can a good fund managerget by on $600,000 a year? By James Altucher
A few days ago I was having breakfast with a friend of mine who runs a successful long/short hedge fund with about $60m in assets. He seemed stressed. "It's hard to make ends meet in this business," he told me. "What do you mean? Your business has been doing great," I said, "You've beaten the market every year. Your business is growing."
"Listen," he said, "let's go through the breakdown. Let's say you have $60m in assets and you charge 2 and 20." He's referring to his2 per cent management fee (a fee taken as a percentage of all assets) and his 20 per cent performance fee (taken as a percentage of profits). "So that is $1.2m in definite cash flow for the year. Plus another $1.2m if I return10 per cent on the year - a total of $2.4m. About half the money I have raised has been through a third-party marketer. The deal is that I give the marketing company 20 per cent of the fees I make. So that is $500k out the door. I'm down to $1.9m.
"I have three professionals working for me. One does admin, client relations, and so on. That's a full-time job. Two help with stockpicking, trading, risk management, due diligence, and so forth. They average at $150,000 each plus insurance, so that is about $500,000 out. By the way, don't print my name. I don't want them to know what the average salary is between them.
"So now we're down to $1.4m. I have to have a good office. I bring clients up here, show them around, everyone hard at work, nice views, Fifth Avenue address. That is $10,000 a month. Then a secretary, office supplies, and so on. Somehow or other adds up to about $80,000. Let's round it up to $100,000 after travel expenses and so now I'm down to $1.2m.
"Well, I have a partner. The guy who helped bring in the initial $15m to get us started and he meets all potential clients that the third-party company sets up and he also finds new clients. He's on the road all the time trying to raise more money, going to conferences, and so on. So my partner and I split 50-50. Now I'm down to $600,000 for me."
"You realise, of course, that this puts you in the top 0.1 per cent of income earners for the global population," I gently reminded him.
"Well, let's go through it. First, taxes take out about $250k for me. So I am down to $350k. Mortgage payments on my 2,200 sq ft apartment are about $8,000 a month. Property taxes another $2,000. Now I am down to $230k. Two kids going to private school plus all the expenses that entails - supplies, piano lessons, religious stuff, and so on. That comes to about $50k, bringing us to $180,000.
"Where am I going to stay in the summer? All my kids' and wife's friends are in the Hamptons. A Hamptons house is going to cost me $50k at least. I'm being generous here. Camp for kids - let's say another $15k. Now we're down to $115k. Let's add up basic household staff: nanny for kids plus housekeeper adds up to about $60k. Now I have $55k.
"Between my wife and I we probably average about $1,000 a week on everything else: food, entertainment, furniture, cable TV, travel - two vacations a year are going to cost me about $10k each, and so on. Again, I'm being very generous. I don't even think I'm counting clothing or dry cleaning costs. But this takes me to right about $0."
"And let us not forget," he added, "this assumes I'm up 10 per cent this year. Right now the S&P is down about 0.5 per cent and all the hedge fund indices are hanging out around flat. I'm up 4.8 per cent on the year so I'm killing all of them. But here we are eight months into the year and I'm on track to do 6-7 per cent. Being up 7 per cent instead of 10 per cent would lop about $90,000 off my yearly take. So in a year where I am totally killing it I'm not even doing as well as in the scenarios I just described where I can't even make ends meet."
"What happens when this SEC regulation kicks in. I have to hire a compliance officer. Compliance officers are making $200k-500k a year. What happens when funds are required to hire a compliance officer. There are about 3,000 funds that are going to have to hire one. Do you think there are 3,000 unemployed compliance officers out there? What's this going to cost?"
My friend threw up his hands and I just didn't have any answers for him. But the conversation reminded me of the excellent 1980 book by Andrew Tobias, Getting by on $100,000 a Year, which details similar scenarios, albeit in pre-hedge fund days.
All of this is to say, the hedge fund business, just like the internet business, is quickly becoming institutionalised, and only the big players will survive, with the rest disappearing or getting acquired through roll-ups of funds. I think an excellent business plan now is to raise money to buy stakes in small to mid-tier hedge funds that have decent results but are having a hard time getting to the next level. To some extent this is done by public companies such as Affiliated Managers Group and the Man Group. But I think we are just at the beginning of this consolidation.