Why aren't fees capped at some limit? Like...maybe 100 million per year? I'm just curious how much harder it is to manage a $100bn fund vs a $200bn fund. Is it twice as difficult?
It's definitely more difficult. Let me give you an example.
I'm currently running an algo that is giving me returns of about 25-30%/year. I do this as a hobby - I don't generally devote more than 10 hours/week to this. Why doesn't NY just give me their money? Why aren't I the greatest investor ever?
The answer is that my algo consists of watching the market and picking off liquidity from the top of the book (typically < 500 shares) when things get unbalanced. Then I passively (for the most part) close my positions a couple of weeks later, very rarely taking liquidity.
I made $2k last year on approx $10k in the market. If I put $20k into the strategy I'd be losing money by taking liquidity from deeper in the book. I.e., buying 500 shares might cost me $10/share but buying 1000 shares might cost me $10.10/share. I'd lose another $0.10 closing my positions, and shaving off $0.20 in profit per trade would kill my profits.
If I were investing 5-10x as much, phrases like "very rarely taking liquidity" would not even be possible - I'd have to take liquidity and I'd then lose the spread as well. And if I were investing 100x as much, I'd be moving the market and losing even more.
I also earn a bit more than $2k on other strategies. I was just describing my highest return strategy and explaining why it can't scale for the sake of discussion.
The real benefit of trading, and why I encourage most quant devs to do it even if they lose money is that it is great mental exercise. When you make mathematical or rationality errors, the market punishes you by taking your money. That's my real reason for actively trading.
why does the compensation need to be tied to the difficulty rather than the assets under management? you haven't actually made a case for that, just assumed it was naturally correct.
> why does the compensation need to be tied to the difficulty rather than the assets under management? you haven't actually made a case for that, just assumed it was naturally correct.
Because in a competitive market, the price of a good is equal to its marginal cost? "Difficult" here is being used synonymously with "expensive".
OK, then why do the fund managers don't just move elsewhere? The flaw in your argument is that you assume that investment services are a commodity, which obviously they aren't, otherwise everybody wouldn't have to be frothing about how some managers make better returns than others.
You cannot really say its twice as difficult but you can easily say that its more difficult because when you are working with a small amount of money you invest in plenty of small promising companies. When you are working in big money a small profit is not going to affect your results much so you need to find a big fish, its very difficult to find such big fish all the time.
