When I manage money for my clients, my own money is on the line along with them. That’s the way it should be. I try to give clients a clone of my portfolios whether on bonds or stocks. This aligns my interests with theirs, because I want to make money over the long run on my assets.
This post is spurred by a post at the Wealthfront Blog, where he cites a Morningstar study where only 40% of mutual fund managers invest alongside their investors. Now, some of that is explainable because the asset class of their funds would not be a complete asset management strategy. But it does not explain why they don’t have any significant amount invested there.
At one firm that I worked for, there was a rule: you could buy anything so long as the firm had first dibs on buying what you wanted to buy. Once the firm was done buying, you could buy your idea. Same thing for selling. The firm must sell first, and only after that could any employee sell. If you are not trading in lockstep with your clients, you must trade behind them. No front-running.
But personally, I prefer managers that have the same incentive as investors. Why? It makes them manage to normal risk levels. Hedge fund incentives, unless there is some clawback for bad future performance, or that performance fees must be reinvested in the fund for a number of years, incent hedge fund managers to swing for the fences. You can make a lot in a really good year, and receive your ordinary fees in bad years, without taking any losses.
My experience was when I was one who hired equity managers that the value shops tended to have large amounts of their personal wealth invested in their funds. Why? One, they believed in what they were doing. Two, value investing tends to self-correct over time. Three, value investors don’t trade as much. They are typically holding investments they would be comfortable holding for a long time. Four, there was an ethical idea of “we eat our own cooking.” They wanted incentives aligned 1:1. I win, you win. You lose, I also lose.
This article is dated, but most of those that eat their own cooking are value-oriented managers. This article is another example, but note that the excellent Vanguard does not require managers to invest in their own funds. Part of that is the bond complex, and also that some of their equity funds are multiple manager funds.
As for me, I have over 60% of my net worth invested in my strategies, and over 80% of my liquid net worth. I believe in what I do. Granted, value investing has not been rewarded recently, but over the long haul, it is usually more than adequately compensated.
[...] Money managers should eat their own cooking. (Aleph Blog) [...]
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blog advertising is good for you google_ad_client = "ca-pub-2776072933217634"; /* Original Tower */ google_ad_slot = "0844014105"; google_ad_width = 160; google_ad_height = 600; google_ad_client = "ca-pub-2776072933217634"; /* Small box */ google_ad_slot = "9411777964"; google_ad_width = 160; google_ad_height = 90; google_ad_client = "pub-2776072933217634"; //160x600, created 12/14/07 google_ad_slot = "7459798277"; google_ad_width = 160; google_ad_height = 600; google_ad_client = "pub-2776072933217634"; //160x600, created 12/14/07 - 2 google_ad_slot = "0041018587"; google_ad_width = 160; google_ad_height = 600; blog advertising is good for you Disclaimer David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures. Also, though David runs Aleph Investments, LLC, this blog is not a part of that business. This blog exists to educate investors, and give something back. It is not intended as advertisement for Aleph Investments; David is not soliciting business through it. When David, or a client of David's has an interest in a security mentioned, full disclosure will be given, as has been past practice for all that David does on the web. Disclosure is the breakfast of champions. Additionally, David may occasionally write about accounting, actuarial, insurance, and tax topics, but nothing written here, at RealMoney, or anywhere else is meant to be formal "advice" in those areas. Consult a reputable professional in those areas to get personal, tailored advice that meets the specialized needs that David can have no knowledge of. 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