If you’re rich and you want to put your money to work earning a low return and making some other rich guy even richer, then it’s hard to do better than to invest with a hedge fund. But suppose you’re prosperous but not really truly rich. Then Anthony Scaramucci may have just the business proposition you need. His game is to market a “fund of funds” (i.e., a big pool of money that invests in a bunch of different hedge funds) to a mass affluent clientel. In other words “investors who have the $200,000 annual income or $1 million in net worth the SEC requires of ‘accredited investors’ but aren’t connected enough to get in with a Daniel Loeb or a John Paulson.” Scaramucci’s example is a successful dentist.
Well, this turns out to be a great way to lose your money:
This year, SkyBridge clients haven’t lost money, but they haven’t seen the kinds of eye-popping returns they read about in the Journal, either. This is partly because of the onerous cost structure of funds-of-funds. For the privilege of investing with guys with recognizable stipple portraits, SkyBridge charges a 1.5 percent annual fee, and passes along a one-time broker placement fee of 3 percent. This is on top of the 2 percent annual fee and 20 percent profit commission charged by each hedge fund in the fund. As critics like Warren Buffett have pointed out, funds-of-funds rarely outperform the market. Over the past three years, SkyBridge’s Series G fund has consistently beat the HFRI fund-of-fund composite index but also fared 48 percent poorer than the S&P 500.
Way back in 1940, Fred Schwed wrote a book with the fantastic title Where Are the Customers’ Yachts? A Good Hard Look at Wall Street, and that’s always the question.