Ex-Bridgewater Analyst Wang Starts No-Fee Hedge Fund
Howard Wang, a former analyst at Ray Dalio’s Bridgewater Associates LP, says most hedge fund performance mirrors the broader market, failing to justify the high fees collected.
That’s why Convoy Investments LLC, the global macro fund he started in November with former Bridgewater software engineer Robert Wu, isn’t charging a performance fee to investors and only a 1.25 percent management fee, he said. The New York-based firm will even manage money pro bono for foundations and underfunded pensions for up to 25 percent of the firm’s assets.
“It’s refreshingly honest,” said Simon Lack, founder of investment firm SL Advisors and the author of The Hedge Fund Mirage: The Illusion of Big Money and Why It’s Too Good to Be True. “There’s some really talented people who do a good job and earn the fees they get, but across the industry there’s a lot of funds that charge fees they probably don’t deserve.”
Wang is betting his offer will hit a nerve with investors who have been paying an average of 1.5 percent of assets and 18 percent of profits, according to Hedge Fund Research Inc., for hedge funds that in aggregate have trailed the U.S. benchmark stock index for more than five years. The $59.1 billion Massachusetts Pension Reserves Investment Management Board has been trying to strike a harder bargain with funds to cut fees, a move that it estimates may yield savings of $7 million for each $100 million invested.
Veteran managers have also weighed in on the $2.7 trillion marketplace. Billionaire Stan Druckenmiller, who produced annual returns averaging 30 percent for more than two decades last year called the industry’s results a “tragedy” and questioned why investors pay hedge-fund fees for annual gains closer to 8 percent.
“Many hedge funds simply repackage or lever cheap benchmark indices and sell it as expensive outperformance,” Wang, 28, said. “While true uncorrelated active management is more valuable than ever, investors need to make sure they are getting what they pay for.”
Convoy explicitly structured a portion of its strategy to contain beta exposure, or performance in line with the market, said Wang. It currently manages internal and friends-and-family money and is seeking to raise as much as $200 million. The fund requires a minimum investment of $500,000, Wang said, lower than the standard $1 million.
Wang worked for $160 billion Bridgewater from 2008 to 2012 and was an analyst on the investment team for the Westport, Connecticut-based firm’s $80 billion All Weather strategy. Wu, 32, worked at Bridgewater from 2007 to 2010 on the operations team.
Wang said for the industry to keep growing fees should come down. Managers are lured by high performance fees to take unnecessary risk in order to gain outsized profits, a gamble that can be particularly dangerous in a low interest-rate environment where expected returns have decreased to about 5 percent versus as much as 10 percent.
The Convoy Funds LP, which bet on and against diversified holdings of stocks, bonds, commodities and currencies, rose 10 percent this year through June and returned an annualized 14 percent since starting in November. The strategy aims to post annual returns of 10 percent. Comparatively, macro managers gained 1 percent this year through the same period and hedge funds on average have climbed 2.5 percent, according to data compiled by Bloomberg.
Some allocators to hedge funds, who boosted capital to an eighth-consecutive quarterly record in the second quarter, aim to mainly pay for alpha, or returns that exceed benchmark indexes. Massachusetts PRIM’s campaign to cut costs in its hedge-fund investments is paralleled by other pensions, including the State of Wisconsin Investment Board, which requires the system to keep at least 70 percent of a fund’s return after subtracting factors such as beta exposure before it pays fees.
Clients have made progress bringing fees down from what was the long-standing norm of a 2 percent management fee plus 20 percent of profits. The structure helped make billionaires out of top-performing managers including Dalio, Appaloosa Management LP’s David Tepper and Paulson & Co.’s John Paulson, who were among last year’s highest-earning investors. It’s also made some less successful managers small fortunes.
“Investors continue to pay fees that are too high and they’ll probably do that for a while longer,” Lack said. “Fees should probably be more differentiated than they are.”
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