His Medallion Fund seems to have done really well. From another article:
Simon's flagship fund, Medallion, requires aminimum investment of several million dollars and charges a 5% management fee and a jaw-dropping 44% performance fee. The fund is closed to new investment and has returned an astounding annual average net of 38% (remember, that's after the high fees). Since its 1988 launch, the fund has lost money in only one year, 1989, which saw a drawdown of 4%.
But I have to ask: why limit the fund to multi-millionaire investors? Why not open it to the other investors too and let them benefit for a change? This is just the "rich-getting-richer". If anybody needs a 38% average annual return, it's most certainly not a multimillionaire; it's more likely a middle-class person who could use the gains.
I apologize for sounding negative here, but this inequity is something that bothers me.
a.) It's much easier to maintain high returns with lower amounts of invested capital. Warren Buffett has talked about this at length; when you're investing $5M, there are a large number of undervalued opportunities where you can gain outsized returns, but when you're investing $500B, you are the market, and it's extremely unlikely that you'll get above-average returns.
b.) Private capital with a personal relationship to the fund manager is usually more patient. Many public funds have a problem where all the individual investors head for the exits at the slightest sign of trouble, but the best investment opportunities are usually available when everybody else is panicking.
Basically, if you want to do well in investing, you really need to do it yourself, and you need to have an information advantage on everyone else in the market. It's a field that rewards being smarter than everyone else, not being more cooperative.
If it was really that easy to identify undervalued companies, you'd think more people would be doing it. I don't think many managers, or individuals, beat the market by a lot, if at all.
I agree, but people who entrust their money to others to manage beat the market by even less. Remember that on average, you should expect to earn an average return minus fees; the one part of that equation that is given are the fees.
first off, there are strict SEC rules on what constitutes a qualified investor. But second, nobody in the hedge fund world wants to hand-hold a bunch of limited partners -- the fewer the better. And if you've got a track record like Simon (and Steve Cohen and Ray Dalio and Paul Tudor Jones and DE Shaw and a few others) then you're likely way oversubscribed whenever you want to open a new fund and as a result can be very picky about whose money to take. Hence the 44% carry.
The Medallion fund is a bizarre outlier. For the most part, high expected return => high risk, which is not what you want for a middle-class wealth-generating engine. It would be much better to tax the hedge-fund winners (at the end-point, with a consumption tax), and redistribute that.
RT's limits are much higher though, and that probably is done with the goal of limiting the number of individual investors. Dealing with investors is a distraction for the fund managers. But the main issue is proprietary information. The more investors you have the higher the risk of information leakage to your competitors.
He states another reason in the interview — if the fund gets too large their models will stop working because their decisions will have too much influence on the market.
I also wonder why those limits exist more generally, not just for this fund.
Maybe those limits affect the timelines on which money is invested and in which it is withdrawn, where-as actually having rules about such things would not work as well.
Was thinking about this as well. In the interview he talks about the act of making a trade moves the market itself. You can't create too much trading volume or you will have distorted the market so much that you can't trade effectively after.
I would imagine he can move and make money at a certain volume (a bank roll of 200 million) and guarantee returns because that level won't distort. But if he had hundreds of billions he couldn't guarantee returns because the moves he would have to make would be so large as to distort the market beyond their measuring.
Much like the observer effect in physics, possibly a trader's effect here.
The simple answer to your question is this: regulation.
The U.S. Securities and Exchange Commission (SEC) prevents hedge funds, private equity firms and other private investment managers from marketing their products to a wide audience.
High risk funds, like the Medallion Fund, are limited to fund raising to an exclusive group of investors that must meet the following criteria:
a) those with a net worth of at least $1 million excluding their primary residence, or
b) annual income of more than $200,000 in each of the two most recent years.
The deeper answer to why the SEC does this is: protection of the 'lowest common denominator' investing public.
By and large the investing public are not what you might call:
1) 'professional' (keeping an eye on the market as part of their job), or
2) 'sophisticated' (as in have a knowledge of the multitude of securities, how they work and how to trade them), or
3) Have a high risk profile and matching capacity for loss.
I think these points, from the SEC's point of view, make the selling of the Medallion fund to the general public inappropriate. I would imagine that from the SEC's perspective, the Medallion fund would be a 10/10 risk profile (highly speculative) and therefore the SEC would want an investor to make an investment fully understanding what they were investing in, and having enough wealth to suffer a total loss of money invested.
This leads into another point, the wording of your post implies that the 'astounding' annual average of 38% net of fees is practically a 'sure thing' when you say that since the fund's launch it took one drawdown in 1989.
However, you miss the obligatory warning that past performance is no guarantee of future results.
Speaking as a retail trader I can quite happily say that for different levels of risk I can make (and have made) the following returns (net of fees):
a) 1% per month with a high level of confidence with what I would call a very low risk trading strategy (annualised to 12% per annum),
b) 2% per month with a medium to high level of confidence with what I would call a medium risk trading strategy (annualised to 24% per annum),
c) 3% per month with a low to medium level of confidence with what I would call a medium to high risk trading strategy (annualised to 36% per annum), and
d) 4%+ per month with a low level of confidence with what I would call a high risk trading strategy.
The point I'm making here is that:
* If you know what you are doing,
* You have the capital (and capacity for loss), and
* You have the risk profile,
Then you can make decent market returns too. Technology has democratised the markets so there really isn't any reason for being negative and bothering about inequality.
You would however have to work for it and if the Medallion Fund are making 82% per annum (38% + 44%) before management fees they are working extremely hard for that.
Simon's flagship fund, Medallion, requires aminimum investment of several million dollars and charges a 5% management fee and a jaw-dropping 44% performance fee. The fund is closed to new investment and has returned an astounding annual average net of 38% (remember, that's after the high fees). Since its 1988 launch, the fund has lost money in only one year, 1989, which saw a drawdown of 4%.
But I have to ask: why limit the fund to multi-millionaire investors? Why not open it to the other investors too and let them benefit for a change? This is just the "rich-getting-richer". If anybody needs a 38% average annual return, it's most certainly not a multimillionaire; it's more likely a middle-class person who could use the gains.
I apologize for sounding negative here, but this inequity is something that bothers me.