WEBVTT - Agecroft's Steinbrugge on Outlook for Hedge Fund Fees (Audio)

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<v Speaker 1>You're listening to taking stock with Box and Kathleen Hayes

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<v Speaker 1>on Bloomberg Radio taking stock of hedge funds. Taking stock

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<v Speaker 1>of hedge fund fees with Don Steinberger. He is managing

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<v Speaker 1>partner for Agecroft Partners. They're based in Richmond, Virginia, and

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<v Speaker 1>he joins us. Now, Don, I'm sure you may read

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<v Speaker 1>the article in Bloomberg Bloomberg Business Week Steve Eisman, who

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<v Speaker 1>made a bundle betting on the collapse of sub prime

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<v Speaker 1>mortgage securities, who now works at New Burger Berman. He

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<v Speaker 1>says that in the future, in ten years, that fees

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<v Speaker 1>for hedge funds will be one point to five percent

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<v Speaker 1>of assets per year instead of the standard two percent

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<v Speaker 1>annual charge plus a performance fee of twenty percent of profit.

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<v Speaker 1>Do you agree? You know, I think there is huge

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<v Speaker 1>pressure on fees in the hedge fund industry, and I

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<v Speaker 1>think that pressure is going to continue, uh in the future.

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<v Speaker 1>What I will say is, I do think that there

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<v Speaker 1>are some managers that are specialized focused on mitch areas

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<v Speaker 1>UM can demonstrate that they can add value, and I

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<v Speaker 1>think there's always going to be people that are willing

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<v Speaker 1>to pay for people that can generate returns. But that

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<v Speaker 1>does not apply to a vast majority of the hedge funds.

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<v Speaker 1>It only replies applies to those maybe ten of the

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<v Speaker 1>industry that are truly talented. Well, Don Steinberg, I remember

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<v Speaker 1>several years ago speaking to the former president of Dallas

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<v Speaker 1>Federalserve Bank, UM, Richard Fisher, who started at Brown Brother's

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<v Speaker 1>Harriman and you know, bond fixed in some currencies that

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<v Speaker 1>worked in government. Starting a hedge fund though back in

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<v Speaker 1>the eighties when there weren't very many of them around,

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<v Speaker 1>and sold it then, uh and and made good money

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<v Speaker 1>on it. Not my he probably would have, you know,

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<v Speaker 1>done it ten years later. But he said back then

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<v Speaker 1>he got sad this vision of things getting the industry

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<v Speaker 1>getting so big you just would not be able to

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<v Speaker 1>have enough people to do that kind of high performance.

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<v Speaker 1>That the quality of the hedge fund and returns would

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<v Speaker 1>probably be diminished over time. And it seems like that's

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<v Speaker 1>what we've seen. Too many people jumping into a very

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<v Speaker 1>tough industry. I think we are seeing too many. I mean,

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<v Speaker 1>right now they're about fifteen thousand hedge funds and it's

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<v Speaker 1>way too money in the industry would be much better

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<v Speaker 1>if the number was significating less. I told you, you know,

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<v Speaker 1>I think only are high quality. The other aren't. I

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<v Speaker 1>think because the other aren't. You're seeing really bad numbers

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<v Speaker 1>UM for various hedge fund industry hedge fund indusseries, and

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<v Speaker 1>you know you're going to see a big shake up

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<v Speaker 1>in the hedge fund industry over time. Down over the

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<v Speaker 1>past three quarters, investors have withdrawn about twenty five billion

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<v Speaker 1>dollars from hedge funds globally. Not that is small compared

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<v Speaker 1>to the roughly what three trillion dollars that they manage.

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<v Speaker 1>But why don't they just have some kind of hurdle

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<v Speaker 1>rate that in other words, if they can't make you

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<v Speaker 1>money above let's say a ten year treasury, they don't

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<v Speaker 1>make money. Doesn't that seem to make sense? Well, you know,

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<v Speaker 1>hedge funds are um. Each hedge fund is going to

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<v Speaker 1>make their own decision on what is in their own

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<v Speaker 1>best interests. And the the pressure on fees for talented

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<v Speaker 1>managers has not been that high outside of three areas.

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<v Speaker 1>You know, when you look at the standard hetch funds

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<v Speaker 1>fee hedge fund charges in their operating docks. Very few

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<v Speaker 1>were going in and changing that to make it lower

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<v Speaker 1>for their current investors or for new investors. Where you're

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<v Speaker 1>seeing major pressure on fees is from large institutional investors.

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<v Speaker 1>You know, fifteen years ago, large and ugeal investors didn't

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<v Speaker 1>get a discount. Today, big pensions and Dowmond's foundations they

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<v Speaker 1>can get some cases fee discounts, and that pressure is

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<v Speaker 1>not going away. I understand that, but I don't under

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<v Speaker 1>But what I don't understand is that if you're managing

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<v Speaker 1>someone's money and you don't know how it's going to

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<v Speaker 1>turn out year from year, of course, but if you're

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<v Speaker 1>managing someone's money and they can get a relatively risk

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<v Speaker 1>free return of one and a half percent in a

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<v Speaker 1>tenure treasury, if you can't do better than one and

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<v Speaker 1>a half percent, why get paid, Well, you shouldn't get

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<v Speaker 1>paid if you can't do better than one and a

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<v Speaker 1>half percent. But there are certain managers, you know, like

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<v Speaker 1>for example, UM, there's some direct lending managers out there

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<v Speaker 1>that are getting you know, eight nine after fee returns

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<v Speaker 1>on their portfolio, that do very good credit research. Uh,

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<v Speaker 1>there's reinsurance managers that are not correlated to the overall

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<v Speaker 1>marketplace that you know, they're historically they've been able to

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<v Speaker 1>generate you know, high single digit returns. Uh. You know

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<v Speaker 1>there's some market neutral managers have done well, so you

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<v Speaker 1>know there are some strategies or managers that are able

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<v Speaker 1>to generate good returns even though a vast majority of

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<v Speaker 1>hedge funds have not done well at the very least.

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<v Speaker 1>Does this make it a lot easier done for investors

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<v Speaker 1>to negotiate with hedge funds on the fees. It's your

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<v Speaker 1>large you know, I mentioned the operating docks of hedge

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<v Speaker 1>funds to talk about what fees edge funds charge. Most

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<v Speaker 1>are still charging one and a half and twenty or

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<v Speaker 1>two and twenty to someone who's going to allocate one

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<v Speaker 1>million dollars. If you're going to allocate you know, fifty

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<v Speaker 1>million and your pension endowment are very large family office,

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<v Speaker 1>you're gonna get a big discount. Where you can get

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<v Speaker 1>discounts is um from smaller managers. You know, fifteen thousand

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<v Speaker 1>hedge funds majority below hundred million, five of assets are

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<v Speaker 1>going to managers blow a hundred million a lot are

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<v Speaker 1>offering founders share discount. Great place to invest because you

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<v Speaker 1>know these managers are small, nimble, some of them can

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<v Speaker 1>generate I think much better returns and larger managers off

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<v Speaker 1>A forty act is growing, but you've got to be

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<v Speaker 1>very careful about forty because they tend not to be

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<v Speaker 1>run the same way as the hedge fund. Alright, well,

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<v Speaker 1>Don Stromberger, thank you so very much for joining us.

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<v Speaker 1>So you'll have to come back soon and educate us

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<v Speaker 1>on the next chapter of the hedge fund world. In particular,

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<v Speaker 1>you're gonna make up what does it take. I bet

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<v Speaker 1>Pim Fox will be a really good hedge fund manager,

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<v Speaker 1>not at all. Well, you never know. I want to

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<v Speaker 1>thank Don Steinberger, managing partner at Agecroft Partners. I want

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<v Speaker 1>to thank our technical director Reggie Basil and our producer

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<v Speaker 1>Samara Lenga. I'm Kathleen Hayes, along with Pim Fox. We

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<v Speaker 1>want to thank you for joining us today. Keep it

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<v Speaker 1>right here. This is Bloomberg coming up. Bloomberg Law will

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<v Speaker 1>take a look at a lawsuit targeting sixteen banks. They're

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<v Speaker 1>being sued for allegedly manipulating a key Australian interest rate

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<v Speaker 1>benchmark in attempt to generate billions of dollars. That's next