SVF

Buffett Misses In Hedge Fund Fees Comment

First of all, the fee for the market exposure, ie beta, should be about 8-9 bps if you look at ETF index funds, which is obviously a ripoff given that institutions that negotiate can buy it for 2-3bps, which is itself a ripoff since there is 8-13bps in securities lending revenue in there.

Second, managers should not be paid a performance fee for putting the money in a bank and getting libor. So all the hedgefund should have a hurdle at least similar to risk free investment. The result is that Buffett's original fee schedule of 25% of all above 6% is actually a fair fee schedule. If as a hedgefund picker you get 2/3 of your picks correct and 1/3 wrong, 25% indicates that the profits above LIBOR is equally split 50/50 between the hedge fund manager and the buyer (if underperformance and outperformance is same magnitude from LIBOR). Fair enough.

So the problem is the 2% and the lack of a hurdle, not the 20%.