Paul Meloan – Vested Interest

From the department of “you can fool a lot of rich people an awful lot of the time” comes this report  of roughly how much money the top dogs in the hedge fund business earned in 2012.

In case you may have forgotten, many of these funds bilk charge their clients on what is known as the 2-20 basis, which means a 2% annual fee regardless of fund performance, then a 20% cut of the fund profits.

By way of comparison, a mutual fund or ETF that tracks the S&P 500 (a broad index of US large-company stocks) can be owned  for approximately 0.10%.

If the market returns 10% (which is a nice year), the index fund investor keeps 9.9%.

If the hedge fund makes 10%, the investor gets 6.4%.

In our 10% return year, the hedge fund has to earn 14.375% in order for the investors to make the same return.  They have to beat the market by almost 44% to beat the index fund!

I don’t know about you, but I don’t like those odds.

Remember, as people like John Bogle have been saying for years, in the aggregate we are all average.  The sum total of all persons investing in a market must equal the market return.  This is not graduate-level economic theory, it is just plain arithmetic.

In investing, it’s not what you make, it’s what you keep.

Paul Meloan is the co-founder and co-managing member of Aegis Wealth Management, LLC, in Bethesda, Maryland USA. Before Aegis Paul was a practicing attorney as well as working in the tax practice of Ernst & Young, LLP.

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