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"Hedge fund manager." The words might conjure up an image of a gray-haired man in a tailored suit, standing in a room full of dark wood, making billions of dollars by boldly gambling with other billionaires' money. But add to that Howard Wang, a 29-year-old in sweatpants, sitting at a desk next to his bed, scrolling through hundreds of ticker symbols on a spreadsheet.
"Every single one is a position that we hold," he says. "For example, Apple. And Amazon."
The spreadsheet represents millions of dollars in stocks, bonds, commodities, futures and currencies from every corner of the world, invested according to algorithms created and calibrated by Wang and his partner Robert Wu — both alums of the high-flying Bridgewater hedge fund — and run out of Wang's apartment.
"That is literally the hedge fund," says Wang of the positions on his computer screen.
"Hedge fund is like the nickname," says Steve Nadel, a lawyer at Seward & Kissel who helps set up hedge funds. "I think you could just as easily call it a 'private investor fund' in that it's privately offered and you don't advertise to bring in investors."
Hedge funds are no longer distinguished by a "hedging" strategy, but by their legal and regulatory status. They employ one of two exemptions to minimize oversight and regulation in exchange for being open to only the wealthiest individual or institutional investors.
Traditionally, hedge-fund managers have also shared a method of charging those investors: A management fee of two cents of every dollar invested, and a performance fee of 20 cents of every dollar gained.
But that's changed since the financial crisis.
"You go back to pre-2008, about every hedge fund had a management fee around 2 percent," says Nadel. "Right now the rate is around 1.7 percent."
Wang's fund, Convoy Investments, is going even lower, to 1.25 percent and discounts for early investors.
"And no performance fees," Wang says.
Does it pay the rent?
"Yeah," he says. "I mean, of course, it depends on how much money we're managing. Right now, it does not pay the rent. For the last few years, I've been basically working out of my own savings."
This thrifty approach is meant to appeal to investors fed up not just with hedge funds' high fees, but the lackluster returns many have been getting in exchange.
"When speaking about returns, one word that I've heard a lot is, you know, mediocre," says Melissa Santaniello, founder of the Alignment of Interests Association, a group of several hundred hedge fund investors. Last year, her group put out a kind of aspirational "Hedge Fund Investing Principles." Among the suggestions were ways of making fees drop in years when returns are lousy. "It's just aligning their interests. It's just making it a bit more fair," she says.
Last year, while individual hedge funds performed well, the average hedge fund made just one or two percent; simply investing in the S&P 500 would have returned 11.4 percent. California's massive pension fund, CalPERS, cuts its hedge fund investments entirely, citing high costs among other factors. And more hedge funds have simply shut down than any year since 2009.
The drumbeat of news adds to an argument advanced by Simon Lack, author of The Hedge Fund Mirage, that the industry has gotten too big to reliably deliver on its promises. In the 1990s, he says hedge funds as a class were a good investment, but as the industry has ballooned to nearly $3 trillion, the number of potential profit-making opportunities hasn't kept up.
"Below $1 trillion in assets hedge funds were able to generate reasonably good returns, and as they went above a trillion dollars, that turned out to be too much money for the available opportunity set," says Lack.
Since 2002, Lack finds that a standard, boring portfolio of cheap index funds, made up of 60 percent stocks and 40 percent bonds, beat hedge funds not just over the 13-year period, but every single year. That's before, during and after the financial crisis, in good stock market years as well as the bad years when hedge funds are thought to be a particularly valuable form of portfolio diversification.
"It really sort of undercuts the whole rationale for having hedge funds in the portfolio," says Lack. "I mean, if they're always going to underperform — always — what's the point?"
But for Howard Wang, bad news for hedge funds is reinforcement to his pitch. In a Skype call with a potential investor in Louisiana, he sounds less like a hedge-fund manager than an index fund rep, as he repeats a number of seemingly self-deprecating claims: He will not be a genius manager who beats the market day to day. He will not be making predictions about the future. Instead, his strategy is mostly passive, mostly automated, and mostly transparent.
"I'm basically just the guy who's going out and executing on this strategy for you," he says.
It's a modest pitch, but it works with this investor. He agrees to invest $500,000, putting Wang's fund at around $18 million. It's a small fund, and the discounted fees that he and his partner earns are made smaller still by auditors, lawyers and taxes.
"It may come out to be maybe 40k per person that we can take home, 30k," Wang says.
Not exactly what you think of as a "hedge-fund manager" salary.
"Right, right," he agrees. "But we're OK with that."
He says it's worth it to run a hedge fund of his own, and to run it a little bit differently.