I’ve been exploring the Empiritrage site over the weekend. There is some good reading there for us rule-based, quantitative system traders. I will be writing this week about one of their ideas.
Empiritrage has recently posted an article called Welcome to the Hedge Fund Hurt Locker. I’m going to post a small excerpt because I found it to be hilarious.
When assessing your investment management relationship, utilize this simple formula to determine your expected performance:
Where, E(r) is the expected return, R(m) is the return on the broad market, Y(n) is the number of yachts the investment manager owns, H(n) is the number of vacation homes, and Fees represent the annual fees (both management and performance fees). Here is an example: R(m) = 10%, the manager has 5 yachts, 1 vacation home, and fees are 2%. The expected return would be .10-.1*5-.1*1-.02= -52% / year. Patent Pending.