On Management Fees, And Warren Buffett’s Hedge fund

On Management Fees by David Merkel, CFA of The Aleph Blog

Yet another letter from a reader:

Hi David –

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michael mauboussin, Credit Suisse, valuation and portfolio positioning, capital markets theory, competitive strategy analysis, decision making, skill versus luck, value investing, Legg Mason, The Success Equation, Think Twice: Harnessing the Power of Counterintuition, analysts, behavioral finance, More Than You Know: Finding Financial Wisdom in Unconventional Places, academics , valuewalkThe debate over active versus passive management continues as trends show the ongoing shift from active into passive funds. Q2 2020 hedge fund letters, conferences and more At the Morningstar Investment Conference, Michael Mauboussin of Counterpoint Global argued that the rise of index funds has made it more difficult to be an active manager. Drawing Read More


Thank you for your commitment to sharing your wisdom, ideas, and experience.  I aspire to one day enjoy the success and happiness that you have in your life and career as an investor.

My question may be a bit more tactical than others that you have profiled: In our current world of 2% & 20% fee structures and where in past eras Buffett promoted a 25% performance fee above a 6% threshold (with the objective of aligning partners’ wealth creation incentives), why do investment managers choose to promote % of AUM only fee structures?  I believe you also promote a similar fee only structure? 

I’m curious about your insights on the rationale for fee only versus performance only structures.  Does your philosophy have anything to with your faith or past experience working at a hedge fund? 

Many thanks and much continued success to you!!

Personally, I like the flat 1% of assets fee (0.3% for bonds), because it does not make me swing for the fences.  I don’t take extra risks or chances with client assets because of a performance fee.  The main goal of investing is to avoid losing money.  That is what I aim to do over a full market cycle, and I have been successful at it over the last 20+ years.

I respect those who do performance only, like Buffett’s formula, but my value proposition is that those who invest alongside me get what I get, less the small fee.  If I underperform in the future, I will be dejected, and it will hurt me far more, than any money I receive in fees.  I aim to do as well as Buffett, but charge less.  I am not driven by profits, but by service to clients.

Another way to say it is to hire guys who will do this business even if they weren’t paid.  That is the way I feel about investing.

I am out to do well, and not to give my clients a bad deal.

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David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.