Wed 16 Apr 2008
Decent Year for Two Ephs
Posted by jeffz under Alumni, Andreas Halvorsen '86, Chase Coleman '97, Finance
Posted at 11:49 amEph alums (and hedge fund superstars) Andreas Halvorsen ‘86 and Chase Coleman ‘97 had pretty decent years in 2007, making $520 million and $400 million respectively. Of course, next to the $3.7 billion John Paulson made, that is mere pocket change.
April 16th, 2008 at 1:12 pm
Excellent catch!
1) Another example of my shoddy reporting. I had assumed that Coleman was the highest paid Eph in 2007. Shows what I know about finance! To be fair (to me), Trader Monthly has Coleman ranked one spot above Halvorsen, although both are listed as earning between $350m and $400m.
2) All of these estimates are guesswork, but I prefer the figures from Trader Monthly over those from Alpha Magazine because the latter includes returns on your own capital, which is mixing apples and oranges, or champagne and caviar.
3) It is interesting to speculate in just how skewed the income distribution among the Ephs really is. If there are 25,000 alumni and the average income in 2007 was $100,000, then the total Eph income would be $2.5 billion, of which Coleman and Halvorsen accounted for about 1/3. Imagine that Gini coefficient!
Does that seem a reasonable estimate? The median would certainly be much smaller. And that counts all alums, many of whom are retired, don’t work, and so on. Another great senior thesis to be written.
April 16th, 2008 at 1:23 pm
Here is the write-up from Alpha Magazine for Halvorsen, tenth on their list.
Does anyone have access to the write up on Chase?
April 16th, 2008 at 1:31 pm
Here are the write-ups from Trader Monthly.
They are numbers 19 and 20 on the list.
April 16th, 2008 at 2:07 pm
Woops, I had forgotten about that earlier post on the same topic … but I guess 900 million combined is worth noting twice!
April 16th, 2008 at 2:10 pm
I wish there was a ranking of fund managers based on how much excess return they have created for their investors over their entire career.
April 16th, 2008 at 7:33 pm
I realize that Ronit is our resident efficient markets ideologue, but come on. Virtually everyone on this list has made billions for his (note that all 100 are men!) clients. That’s why they are on the list.
Now, it is may be true that the collection of all hedge fund managers loses money in aggregate. And it is certainly true that it is very hard to identify, a priori, which hedge funds will be successful and which will blow up. Moreover, many fund managers (like Julian Robinson) look good in percentage terms while their dollar returns stink because they got big and then blew up. Furthermore, 99.99% of the readers of EphBlog should keep their money in low cost index funds.
But just because alpha is hard to make does not mean that these guys aren’t making.
April 16th, 2008 at 7:37 pm
Bitter Amherst grad Bess Levin takes a break from mocking Erin Burnett ‘98 to tease Halvorsen at Dealbreaker. Did any Amherst grads make these lists? And, more importantly, are there any other Ephs that we are missing?
April 16th, 2008 at 9:29 pm
Bitter? Bitter? Is David an elitist like Barry Obama?
April 16th, 2008 at 9:38 pm
Also, I’m not exactly convinced that Alpha doesn’t exist, but I am pretty sure that management fees do tend to destroy investor returns… there was a great calculation as to where BRK would be if Buffett had been collecting 2-and-20 all along - it made an enormous difference, and left investors much, much poorer.
There is surely nothing laudatory or praiseworthy in the fact that these middlemen have grabbed such a large share for themselves. Hedge funds are necessary, but current levels of hedge fund fees are not going to last.
April 16th, 2008 at 9:56 pm
So, you think that Coleman and Halvorsen should charge zero? They should manage money for free? Perhaps we should just pass a law which fixed their salaries? And what possible definition of “middlemen” applies to these Ephs?
If you believe in freedom, then you have to believe that the fees charged by hedge-fund managers should be decided by the market? If rich people (or rich institutions like Williams) want to pay Coleman/Halvorsen 2/20, who are you to prevent that free exchange?
Now, it is perfectly reasonable to want to tax that income, perhaps at a very high rate. But hedge-fund fee regulation is silly.
April 16th, 2008 at 10:24 pm
Wow David, step back from the ledge - Ronit never said anything about regulation. Nor did he say they should charge zero. At least disagree with his actual opinion and not the one you put in his mouth.
April 16th, 2008 at 11:29 pm
Holy crap, all I meant to say is that market forces will put serious downward pressure on the unsustainable 2-and-20 system. There is a growing consensus among a lot of hedge fund managers - institutional investors will be taking a much closer look at fees in coming years, as they should be doing, and the HFMs’ overall take will moderate somewhat. No one wants to pay 2-and-20, and I think describing it as merely a “free exchange” glosses over a helluva lot of institutional inertia and agency problems that keep such ridiculous fee structures in place.
Did you seriously think I was for hedge fund fee legislation?
As for the “middlemen” comment, read Buffett’s 2006 letter to investors.
April 16th, 2008 at 11:40 pm
Also: I, working as I do in investment research, am also a “middleman” or “helper”… and I don’t see anything wrong with that. But I sure as hell wouldn’t glory in my salary, or in the overall profits made by my firm, because we get paid out of the assets of institutional investors. They pay us because we do, indeed, have some value to them. We are here to serve the owners of assets get a decent return on their wealth; surely, you can see why I would consider it rather unseemly, if not vulgar, for us to brag about how much of those assets we managed to grab for ourselves in the process?
This is why I said I’d like to see a career league table for returns to investors. Doing well on that list, as opposed to “management fees collected”, is in fact praiseworthy.
April 17th, 2008 at 12:47 am
“rather unseemly, if not vulgar, for us to brag about how much of those assets we managed to grab for ourselves in the process”
Not to mention just plain stupid.
April 17th, 2008 at 4:28 am
Most investors tend to perceive that they lack leverage and to be otherwise insecure, and if some money manager boldly tells or implies to them that 2 and 20 (or another healthy cut of the pie) is the long established, competitive, fair rate, they tend to meekly accept it without any or much attempt at negotiation or seeking alternatives. I’m not sure that as a generality this fact of life will change in the near or intermediate term, and my crystal ball has clouded for the long term.
April 17th, 2008 at 11:32 am
I am confused.
Ronit seems to think that Coleman/Halvorsen’s performances are not “praiseworthy.” Why? There are hundreds of Ephs in finance and, I think, Coleman/Halvorsen are two of the most successful. You don’t think that we should praise success?
This is no different than, say, Michelle Rorke ‘06 being on of the most successful Ephs in running. I think that this is praiseworthy. You don’t? You have a problem with Diana telling us about her triumphs?
Now, if I (or Jeff) had said something silly like: Halvorsen/Coleman are more praiseworthy than Rorke or an Eph teacher or an Eph lawyer or an Eph Marine, then you would have grounds for complaint. It is very hard to compare performance across fields. But that is not what I (or Jeff) did. We just pointed out that these Ephs were hugely successful in their chosen fields.
Now, your point might make sense if you thought that these Ephs (or, if not them in particular, men in similar positions) were not “really” successful, that they did not really add value, that their clients were, in truth, ill-served by investing in them. That is not an unreasonable view, and may even be true for hedge-fund managers taken as a group. But that is not what we are discussing. The issue is whether the hedge-fund managers on this list add value. It is fairly obvious that they do. Or do you think that you are smarter than all those stupid clients who invest in them?
Can’t you do some math? Look at the assets that these men have managed. Look at their long-term records. They have all generated, at least, hundreds of millions (and, in most cases, billions) dollars for their investors. Each them (I think) are wildly successful in any sort of “career league table” that you might want to construct.
If you like, we can dive into the details here. Say that Chase Coleman manages $5 billion and was up 71% (after fees!) last year. That means that his investors made $3.5 billion! How about a little praise?
Well, if all you meant to say was that hedge-fund managers as a group will face fee pressure, than maybe you are right, although I am not so sure. But that is not what we are talking about! We are talking about these specific wildly successful hedge-fund managers, both Coleman/Halvorsen and the others on these lists. You think that they are facing pressure on fees? Ha! You have no idea what you are talking about. If anything, their fees are going up.
What are you for? You would recommend that the College not invest in these funds? You would recommend that Coleman/Halvorsen cut their fees? Why? I am honestly confused about what aspect of the world you would change.
April 17th, 2008 at 12:33 pm
1. “Success” at fund management does not equate to “management fees collected”
2. “Management fees collected” is no measure of “success” at fund management
3. “Return to investors” is a valid measure of “success” at fund management
4. We should, indeed, highlight successful Ephs, including Eph fund managers
I have no idea how I can make this any clearer, David.
Why does everything have to boil down to legislation or changing the world with you? All I am describing here is an impersonal market process: fund management is a service like any other, the fund managers’ take has been at record levels recently, and this has drawn a great deal of competition into the space just at the height of a bull market. You can draw the conclusions for yourself, or you can survey hedge fund managers as to how they see the future of hedge fund fees.
As for Coleman/Halverson and their ilk, obviously it is in their interest to get as much as they can while the getting is good (even for such talented managers, it is fairly safe to bet on mean reversion), but let’s not pretend that this is a good measure of their value as fund managers.
Seriously, would you choose to invest in a fund based on how big their fees were last year? That would be utterly insane, especially given the well-documented phenomena of mean reversion. Thus, my point that this is almost precisely the wrong way to rank fund managers.
April 17th, 2008 at 12:43 pm
Perhaps the CBOT should start trading fund-manager performance futures so we could let the market settle this debate ;)
April 17th, 2008 at 12:52 pm
If dk had to put $1 in the Alumni Fund (or “Williams Chooses”) for every time he yanked someone’s chain on this blog, we’d have a nice little index going.
April 17th, 2008 at 2:06 pm
LG,
1) Feel free to check with your friends in the Alumni Office to confirm that my donations match my chain pulling. I also (forgive the bragging) have more classmates on my class agent list than just about anyone else in my class.
2) I stand ready to arrange start-up funding EpsChoose. Alas, I have not heard from any student interested in the project. But, perhaps someone in next year’s Gargoyles will take over.
3) Ronit and I are in agreement! He writes:
Correct! The key aspect of these lists is that, although the direct measure is “income from fees,” this number is more than 90% correlated with “return to investors.” In other words, Coleman/Halvorsen are among the top 25 or so most successful hedge-fund managers in the world when it comes to return to investors.
In fact, we can even calculate that return back-of-the-envelope. If Coleman/Halvorsen made about $1b together, then their clients made $4b because the lion share of those fees are part of the 20% performance fee. In other words, you could (very roughly) figure out the client take by quadrupling manager income.
So, give the $4 billion “return to investors” for the clients of Coleman/Halvorsen, will you join us in praising their success? Or do you measure “return to investors” in something other than percentages or dollars?
April 17th, 2008 at 2:31 pm
I’d prefer the average annual percentage rate of change for investors’ capital (after fees) achieved by a portfolio manager over his entire lifetime… if you want to exclude the disproportionate number of small fish, we could count only those years where a fund’s AUM puts them in the top 20% of all hedge funds (since hedge fund AUMs probably follow a Lorenz-like distribution). But I’m picky like that.
The problem with your measure of success, David, is that it is likely to rank highly those managers who follow the John W Meriwether method:
Year 1: Collect 2 & 20
Year 2: Collect 2 & 20
Year 3: Collect 2 & 20
Year 4: Collect 2 & 20
Year 5: Collect 2 & 20
Year 6: Collect 2 & 20
Year 7: Anomalous Event Y happens, fund blows up, lose all my investors money, pray I don’t have too much in the fund
Year 8: Raise money for new fund that will be modeled after old fund, which would have worked well if not for those pesky kids
April 17th, 2008 at 2:40 pm
“Feel free to check with your friends in the Alumni Office to confirm that my donations match my chain pulling.”
This is great. I can relax now, knowing that all the chain yanking goes for a good cause. Seriously.
April 17th, 2008 at 5:53 pm
We are making progress!
But, Ronit, I am not sure if I am understanding your measure. Do you mean that capital under management plays no role? You think that someone making 10% on their 50k E-trade account is more successful than someone making 9% on a $1b portfolio? That seems implausible to me. I have never heard of an institutional investor who would agree. (Counter examples welcome.)
Now, the exact amount to weigh capital is unclear. Indeed, a common complaint about large hedge funds is that they take in too much capital to manage, although this complaint is more commonly heard from those investors already in rather than those who want to get in.
I see that you achieve some of this by restricting the capital to being at least at the 80th percentile, but I am not sure what that dollar amount would be. Do you have an estimate? I think that this amount would be “too” low because there are so many tiny hedge funds with little capital. Could we agree on a dollar figure like $1 billion? Or $100 million? As long as the portfolios are large enough to accommodate institutional investors, I will go along.
You write want a measure that applies “over his entire lifetime.” Surely you mean, “career to date.” If we have to wait for a manager to die or retire, we will not be able to call someone successful for decades.
Anyway, if we can agree that the contest is among institutional-sized managers over their careers to date, then Coleman at least stacks up very, very well. Certainly, he is peer to most of the others on this list.
Or are there dozens of unheard of managers who have generated great returns (by your measure) but aren’t on these lists? That makes no sense. Why wouldn’t they be on the list?
And all of this is leaving to one side what every hedge fund manager I know would argue: raising assets is part of the job description. If you can’t raise assets than, regardless of your alpha, you are not a success.
April 17th, 2008 at 11:20 pm
The cutoff for the 20th percentile would change year to year…. I don’t know the dollar amount.