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1/9 Thread: Incentives for active investing
During one of my interviews for an Analyst role, I was once asked whether I am concerned about my career prospects given the money flowing from active to passive.
I said it's perhaps best for everyone if index huggers cease to exist.
During one of my interviews for an Analyst role, I was once asked whether I am concerned about my career prospects given the money flowing from active to passive.
I said it's perhaps best for everyone if index huggers cease to exist.
2/9 The conversation turns tricky when it gets to managers with high active share but poor (recent and/or long-term) track record.
It's tricky because of the luck vs skill conundrum.
It's tricky because of the luck vs skill conundrum.
3/9 While it may not be easy to untangle skill from luck (good/bad), I do find it unconscionable to get paid a large sum of money while underperforming your benchmark in the LT.
Just see the difference in fees and then think how many funds don't beat the index in the LT.
Just see the difference in fees and then think how many funds don't beat the index in the LT.
4/9 Think about a PM who gets paid $200k base but underperformed $SPY ~1% (before fees) in last 10-15 years. There are plenty of examples like that.
That's >3x US per capita income (ignoring bonus) for doing what exactly?
That's >3x US per capita income (ignoring bonus) for doing what exactly?
5/9 Given the uncertainty of beating the market, I don't understand why AUM (and not performance) based fees still exist.
Given the fees pressure, why doesn't everyone in the investment team get paid a very low base comp i.e. $60K and get outsized bonus if fund beats?
Given the fees pressure, why doesn't everyone in the investment team get paid a very low base comp i.e. $60K and get outsized bonus if fund beats?
6/9 Low base pay can lead to cost structure being more prudent and active funds to be more competitive to passive alternatives.
Plus, if you are a bad manager, you take less from investors' already diminished return.
Bonus shouldn't be based on annual perf., but LT perf.
Plus, if you are a bad manager, you take less from investors' already diminished return.
Bonus shouldn't be based on annual perf., but LT perf.
7/9 Of course, a plain vanilla comp structure like that could entice managers to take more risks, so risk-adjusted returns need to be considered.
If active investing wants to survive, it needs to care much more about investors than many currently do.
If active investing wants to survive, it needs to care much more about investors than many currently do.
8/9 Most people in the active investing business genuinely love what they do.
It's hard for me to believe people will leave in droves if incentive comps are more aligned with investors' interest.
It's hard for me to believe people will leave in droves if incentive comps are more aligned with investors' interest.
9/9 I'm not a PM, but if I were I would tell myself everyday this:
The return belongs to the investor.
The return belongs to the investor.
The return belongs to the investor.
Another related thread on the same topic is here: https://twitter.com/borrowed_ideas/status/1269776975637479424
The return belongs to the investor.
The return belongs to the investor.
The return belongs to the investor.
Another related thread on the same topic is here: https://twitter.com/borrowed_ideas/status/1269776975637479424
