Bond guru Bill Gross of Janus Capital has become the latest figure from the world of finance to slam the hedge fund industry.
Gross: Story of The Day – Deep out of the money hedge funds shut down if 20% of profits out of reach. Start over later with clean slate!
— Janus Capital (@JanusCapital) October 13, 2015
It’s pretty obvious that Gross is referring to Fortress Investment Group in that Tweet.
On Tuesday, Fortress said that it’s closing its macro hedge fund after a challenging two years. The fund’s chief investment officer, Mike Novogratz, will also retire with a $US255 million payout based on his equity in the company.
Fortress’ macro fund fell 4.67% in September and was down about 17.5% through the end of September. A lot of hedge funds have struggled to produce returns this year. On average, hedge funds are down about 2.14% year-to-date, according to Hedge Fund Research.
The recent poor performance has caused some to call into question the fees that funds charge.
Hedge fund managers are typically paid through a compensation structure commonly known as the “2 and 20,” which stands for a 2% management fee and a 20% performance fee. That means a hedge fund manager would charge investors 2% of total assets under management and 20% of any profits.
Warren Buffett, who spoke at Fortune’s Most Powerful Women Summit on Tuesday, slammed hedge funds and their fee structure. Buffett’s argument is that some fund’s don’t really have to deliver on their promise for performance when they can collect 2% fee just for managing massive amounts of capital. He used an example of a $US20 billion fund taking home $US400 million just from the management fees.
Based on Gross’ recent lawsuit against PIMCO, it’s clear that he’s not a fan of hedge fund fees either, especially when they’re not performing.
From the complaint:
The investment offerings under [Dan] Ivascyn carried hefty, hedge-fund like fees, typically charging investors not only as much as 20% of all investment returns, but also skimming off as much as 2% of all assets under management each year, regardless of performance. This was far in excess of PIMCO’s typical fee of 50 basis points (i. e., just one-half a per cent).