Re: Gig

1

I'm sure he honed his rhetorical skills in our comment threads.


Posted by: SP | Link to this comment | 04-22-15 6:25 AM
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...is an inflated way of presenting the actual gains of forty million dollars, net of fees.

Isn't that pretty much making the case that financial management is bullshit, regardless of whether it is in house or not.


Posted by: Moby Hick | Link to this comment | 04-22-15 6:41 AM
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I assume that almost all of the $2 billion in management fees goes to salaries of somebody or another. That's $200 million a year spent paying people who was presumably very capable and could contribute much more to society if we nationalized the banks and they looked for jobs in other sectors.


Posted by: Moby Hick | Link to this comment | 04-22-15 6:45 AM
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One of the revelations for me in Piketty's book was his absolutely ironclad demonstration that (as Daniel points out) big money routinely buys outperformance. I hadn't known that.

(Obviously, my surprise at this is a function of my naivete and not the depth of Piketty's insight, but I thought his proof, using university endowments and other big funds, was pretty nifty.)


Posted by: politicalfootball | Link to this comment | 04-22-15 6:45 AM
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If big money is buying outperformance, who's taking the loss? Day traders? Amateurs actively managing their own portfolios? 401ks?


Posted by: SP | Link to this comment | 04-22-15 6:47 AM
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4 written before reading 2 and 3, but I think Daniel's well-made point is that even doing an arguably half-assed job, the money managers here didn't cost the funds any money, and other likely alternatives would have, relatively speaking, cost money.


Posted by: politicalfootball | Link to this comment | 04-22-15 6:50 AM
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Part of the outperformance of large funds is due to being able to buy illiquid or hard-to-value assets. If you have a lot of money and a lot of time, you have choices not available to fund managers whose job is buying and selling listed securities.

I don't know whether this is the whole story, or even how to assess whether this is an important point or a distraction.


Posted by: lw | Link to this comment | 04-22-15 6:52 AM
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Right, but my point is that they used to do the same half-assed job when they were 5% of the economy and now it's up to 8 to 9% of the economy.


Posted by: Moby Hick | Link to this comment | 04-22-15 6:53 AM
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I mostly haven't gotten over my reaction to 2007-8. They should have hung a few people so we could all move on.


Posted by: Moby Hick | Link to this comment | 04-22-15 7:00 AM
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The message of this piece seems to be that making money by investing is impossible when you factor in costs, and you should be happy that you didn't lose money. Is that right?


Posted by: Cryptic ned | Link to this comment | 04-22-15 7:03 AM
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That's how I read it.


Posted by: Moby Hick | Link to this comment | 04-22-15 7:05 AM
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I'd really like to see some more explication of the claim that the city can't save by managing the fund inhouse, because you'd just have to pay the inhouse managers as much as you do Wall Street, so it'd be a wash, and no one would tolerate paying city employees that much anyway.

I'm a civil servant, making a civil servant salary, and I litigate (on occasion) against big firm partners who make millions, and I do okay. (Most of my work, admittedly, is litigating against pro se plaintiffs who get puzzled figuring out which end of the crayon to write with, but the big firm cases do come up). In the legal field, you can come pretty close to the results the big firms get by paying ordinary civil servant salaries.

Maybe this is absolutely impossible in the investment management field, but I can't really see why it should be, particularly given that it doesn't seem as if there's a tight connection between management skill and investment results.


Posted by: | Link to this comment | 04-22-15 7:14 AM
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Probably clear who that was from context, but it was me.


Posted by: LizardBreath | Link to this comment | 04-22-15 7:14 AM
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4: Yeah, I thought that was a great part of Piketty, too. That was the one point where he actually changed my mind about something, rather than giving me new arguments for what I already believed.


Posted by: rob helpy-chalk | Link to this comment | 04-22-15 7:17 AM
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12: It seems to be by analogy with sovereign wealth funds, especially OTPP, all of which seem to pay a lot more than 20 basis points on in-house expertise (and, although not stated explicitly, outperform index funds).

The claim seems to be that, with a pool this size, you can:

A. Pay some for active management and underperform index funds (that's what the MD study found)

B. Pay some for active management, overperform index funds, but pay essentially all the gains to the management (why NY was able to do this and most pension funds weren't isn't explained; are they simply part of the spectrum of funds getting better and worse results, or did they do something especially right?)

C. Pay a little for index funds, match performance of index funds, but net out somewhat negative due to de minimus fees that add up

D. Pay quite a bit for in-house managers that will greatly outperform index funds, but maybe it still nets to very little gain?

Other than A, these all seem like rough washes, with Wall Street gaining the most from B, ex-Wall Streeters gaining the most from D, and funds and Wall Street gaining the least from C.

Am I missing something?


Posted by: JRoth | Link to this comment | 04-22-15 7:34 AM
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12: in litigation you have a judge who is theoretically there to ensure a just outcome regardless of who has the better lawyer. in financial markets not so much, right?


Posted by: Jake | Link to this comment | 04-22-15 7:38 AM
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(why NY was able to do this and most pension funds weren't isn't explained; are they simply part of the spectrum of funds getting better and worse results, or did they do something especially right?)

It isn't possible for everybody to outperforming the market (index funds). That's my problem with B. You send up with an arms race where every investor is paying more and more get the same results.


Posted by: Moby Hick | Link to this comment | 04-22-15 7:41 AM
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12: Oh, and I think the underlying premise is that the vast majority of fund managers do no better than a coin toss, but if you spend enough, you can do better. This is (supposedly) unlike lawyers, where the vast majority* are perfectly competent to handle most cases that aren't highly technical/specialized, and paying for "better" lawyers mostly buys you cover ("Nobody ever got fired for...").

What we don't have proof for is that A. you can reliably hire managers who will outperform indexes (however few they may be), or B. most lawyers really are about even on competence. The latter claim is one that seems to be agreed upon around here (at least with enough caveats on how to define "most"); I'm skeptical of the former, but it at least seems possible (I can't help but think by analogy to baseball: the vast majority of pitchers have very little control over what happens to batted balls, and so there's a whole subfield dedicated to Defense-Independent Pitching Statistics; but it turns out that some pitchers are outliers and really can, season after season, get better outcomes than DIPS would suggest).

*put whatever qualifiers you want in terms of school attended, professional background, etc.; my point is that it's a really big pool


Posted by: JRoth | Link to this comment | 04-22-15 7:43 AM
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17: Right, but large public pension funds have vastly greater resources than most. Since I've brought up baseball, it's like the Yankees or Dodgers: having all that money doesn't guarantee success, but it sure ups the odds.


Posted by: JRoth | Link to this comment | 04-22-15 7:44 AM
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I'm poking at D -- that inhouse managers have to make roughly as much as it would cost to pay Wall Street to do active management, or [they won't get good results? something else bad would happen?]. I don't know that this is false, but I can't think of another profession other than professional athletics where there's that tight a connection between salary and measurable performance -- I used the legal profession as an example, but there are a lot of very, very bright, skilled people in a whole lot of professions who are doing very good work for salaries at the bottom end of six figures or below.

I would really like to see what happens when you try to do active management with the best staff of civil servant fund managers the city can hire for ordinary civil servant salaries.


Posted by: LizardBreath | Link to this comment | 04-22-15 7:47 AM
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I don't know about public pension funds being that large. PA, at least, has many small ones. I don't have vastly greater resources than anybody, but my retirement is with Vanguard, so I think my funds may be invested in a much bigger pool than, say, Pittsburgh city employees.


Posted by: Moby Hick | Link to this comment | 04-22-15 7:50 AM
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I don't think the overperformance is something you just pay for. It comes from the factors mentioned above, that the rich can hold unusual assets that aren't publicly traded, or closely-held corporations which can avoid wasteful short-term 'hit quarterly projection' stuff.

But also average investors don't even get typical market returns, even if they invest in passive index funds, because of things like poor timing (pulling money out of stocks in 2009 at the low point because of panicking, or that is when you lost your job and had to withdraw from /stop contributing to your 401k). The rich have more liquidity and ability to reduce spending.


Posted by: yoyo | Link to this comment | 04-22-15 8:00 AM
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It's really hard for me to think about this stuff without getting irate, which has locked me into a pretty poor understanding about all this because I don't like feeling irate.


Posted by: heebie-geebie | Link to this comment | 04-22-15 8:03 AM
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there are a lot of very, very bright, skilled people in a whole lot of professions who are doing very good work for salaries at the bottom end of six figures or below.
Tangential, but the magic nature some people bestow on six figures really pisses me off- the Boston Globe, every single year without fail since at least the early 2000s, publishes a breathless article about how many public employees are making over $100k. Yes, let's encourage retention of competent government employees by complaining about how their wages aren't stagnant enough!


Posted by: SP | Link to this comment | 04-22-15 8:06 AM
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IMHMTCHB


Posted by: SP | Link to this comment | 04-22-15 8:06 AM
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Heebie can't get average market returns because she's too emotional.


Posted by: SP | Link to this comment | 04-22-15 8:07 AM
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24: I think that's largely people not psychologically adjusting for inflation. Think of the word 'millionaire', which still has an aura of 'really really rich' around it, but now probably includes most dentists.

"Six figures" in living memory meant "Wow, that's a really amazing salary, you must bathe in caviar nightly", and now, while it's still quite a good living, it doesn't mean anything like caviar baths.


Posted by: LizardBreath | Link to this comment | 04-22-15 8:11 AM
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12: Harvard does that. And there are always articles about how outrageously compensated they are, but my guess is that it's less than what Yale and Princeton are paying the people they outsource it to.


Posted by: Bostoniangirl | Link to this comment | 04-22-15 8:11 AM
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21: Oh yeah, DD's only talking about pooled ones or big, statewide ones. And that's the point: City of Pgh should either pool with someone (much) bigger for active management, or pay the bare minimum for an index. Anything else is too risky and/or too expensive.


Posted by: JRoth | Link to this comment | 04-22-15 8:13 AM
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re: 24

Quite. I don't know how many people in my institution* are making over £65K, probably not that many, but, ffs, those on the upper end of the salary scale in our place are pretty much all people with graduate degrees, 15-20+ years of experience, probably some specialist vocational qualifications, and national or international reputations.

* I'm thinking of the library, not the university as a whole.


Posted by: nattarGcM ttaM | Link to this comment | 04-22-15 8:14 AM
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Federal 401k equivalents are limited to a small number of index funds. Lots of 401ks and college funds now offer lifetime funds, which invest in equities while payout is inthe distant future and shift to bonds as payout comes closer, gradually and automatically.

So the desired passive investment product exists already, and is used in lots of places.


Posted by: lw | Link to this comment | 04-22-15 8:14 AM
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Most any fee, even a fraction of one per cent, will come to look big if it's multiplied by tens of billions of dollars.
Most any enormous number can be made to appear small if you can find another even bigger number to divide it by.


Posted by: Eggplant | Link to this comment | 04-22-15 8:17 AM
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My baths are limited to the occasional salmon roe.


Posted by: SP | Link to this comment | 04-22-15 8:18 AM
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32: Eggplant's theory of relativity!


Posted by: peep | Link to this comment | 04-22-15 8:18 AM
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32: Right, the assumption that makes it look reasonable is that the fee is going to be calculated on a percentage basis. Lawyers don't work that way -- I've been on a small team that had a multibillion dollar win, and it had no effect on our fees. Architects don't work that way -- the fee for designing a building isn't calculated on the basis of what the rental value of the building will be when completed. If the laboriousness and skill required for managing a large fund isn't a linear function of the size of the fund, it's not obvious that the fees should be.


Posted by: LizardBreath | Link to this comment | 04-22-15 8:22 AM
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35: Don't plaintiff lawyers often work for a percent of winnings?


Posted by: peep | Link to this comment | 04-22-15 8:23 AM
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(Obviously, percentage-based fees are the industry norm, and where that's thoughtfully negotiated, there's nothing necessarily wrong with that. But it's not an obvious fact of nature that they have to be that way.)


Posted by: LizardBreath | Link to this comment | 04-22-15 8:24 AM
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AMHBDHB, didn't "millionaire" shift in meaning at some point from assets to income? Probably hard to determine when, though.

(Etymological fun fact: "assets" was never used in the singular before early 19C. It's from law-French aver assez meaning "have enough [property to cover debts in probate]".


Posted by: Minivet | Link to this comment | 04-22-15 8:26 AM
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36: Sure, contingency fees exist -- I should have said lawyers don't always work that way, not that they don't work that way full stop. But you can hire the best legal talent there is without tying it to a percentage of the value at stake.


Posted by: LizardBreath | Link to this comment | 04-22-15 8:26 AM
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"Works on contingency? No, fee!"


Posted by: heebie-geebie | Link to this comment | 04-22-15 8:27 AM
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Architects don't work that way -- the fee for designing a building isn't calculated on the basis of what the rental value of the building will be when completed.

This isn't quite right. I mean, you're right that it's not final rental rate, because that includes stuff like real estate costs. But architects' fees often are calculated on the basis of construction cost, even though writing a note that says a counter is granite costs no more than a note that says a counter is Formica.

I tend to feel as if that's a scam, but I have learned that the people who want the fancy stuff tend to be more demanding, so it's not completely groundless.

A better way to make the intended point might be, "Architects don't work that way -- the fee for designing a building isn't calculated on the basis of square footage." Because if it were, a warehouse would have a higher fee than a luxury townhouse.


Posted by: JRoth | Link to this comment | 04-22-15 8:28 AM
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The French don't know anything about saving and investing. There's not even a word in French for assets.


Posted by: Opinionated W | Link to this comment | 04-22-15 8:29 AM
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I charge based on the elaborateness of my analogy.


Posted by: heebie-geebie | Link to this comment | 04-22-15 8:31 AM
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I haven't read D^2s piece, but I presume he's talking to an extent about David Swensen and the Yale Model and Jack Meyer's departure from Harvard (Meyers' team was pulling in extortionate fees from the POV of the Harvard faculty but were probably slightly underpaid compared to people running similarly-sized hedge funds.) Because there's an interesting-ish update to Meyer's story.


Posted by: snarkout | Link to this comment | 04-22-15 8:31 AM
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41: I was, in fact, bullshitting without knowledge, but I think your more accurate statement still makes the same point.


Posted by: LizardBreath | Link to this comment | 04-22-15 8:33 AM
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44: It's paywalled, summarize?


Posted by: LizardBreath | Link to this comment | 04-22-15 8:34 AM
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No matter what, you need some fund managers. It wouldn't really work to have them just by an S&P 500 fund. Even if you did index funds, you need to allocate among different classes of assets. Pension funds need to grow, but they also need current income to pay out to retirees.


Posted by: Bostoniangirl | Link to this comment | 04-22-15 8:34 AM
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44: I met Meyer once. He seemed like a nice guy. I think he may have managed the NYC pension fund at one point. He also worked for an organization that invested part of its money in businesses that would develop the local neighborhoods. So, not a grant, an actual investment, but for purposes of public policy. He seemed like a pretty public-spirited guy for a fund manager.


Posted by: Bostoniangirl | Link to this comment | 04-22-15 8:39 AM
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40: no, "money down"!


Posted by: nosflow | Link to this comment | 04-22-15 8:39 AM
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"We don't get paid unless you get paid. Unless you leave your wallet in our waiting room."


Posted by: Moby Hick | Link to this comment | 04-22-15 8:40 AM
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"We'll lose your case and pass the savings on to you!"


Posted by: AcademicLurker | Link to this comment | 04-22-15 8:44 AM
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"Do not touch Willie"


Posted by: heebie-geebie | Link to this comment | 04-22-15 8:45 AM
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"As Hitler said to Czechoslovakia, 'We only want about one third.'"


Posted by: Moby Hick | Link to this comment | 04-22-15 8:47 AM
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Too soon?


Posted by: Moby Hick | Link to this comment | 04-22-15 8:50 AM
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So his anti-Betteridge answer is "Yes, even by their thieving standards, by at least five basis points," right? Dsquared is very, very good. This suggests another possible explanation for Wall Streets fees.


Posted by: Eggplant | Link to this comment | 04-22-15 8:51 AM
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I had to google to remember Betteridge's law (for anyone in the same boat, "If there's a question in the headline, the answer is probably No."). But I don't understand your last sentence.


Posted by: LizardBreath | Link to this comment | 04-22-15 8:55 AM
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Their rhetorical skills. Convincing people to give them lots of money.


Posted by: Eggplant | Link to this comment | 04-22-15 8:59 AM
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If he wants to take a pay cut, he can become a grant writer. It's like a novelist, except you don't need an ending.


Posted by: Moby Hick | Link to this comment | 04-22-15 9:10 AM
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It's paywalled, summarize?

FYI, the WSJ paywall is leaky. Just google the headline and click on the first google result.


Posted by: knecht ruprecht | Link to this comment | 04-22-15 9:13 AM
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Gaming the market- since people on automatic 401k investments such as lifetime funds automatically buy shares at specific times that their contributions enter the system (weekly, biweekly, or monthly) isn't there likely to be a spread because the price goes up with each infusion of automatic investment? I'm not sure what the corresponding lower price period would be- maybe when pensions or accounts of retirees sell their shares, is that something that also happens on a routine basis (monthly)? So sell into the regular flood of buyers and buy from the regular flood of sellers and get rich.


Posted by: SP | Link to this comment | 04-22-15 9:20 AM
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If you do 60, please also devise a set of options that pay out big if the idea fails, and then let me know that CUSIP.

Obvs, if there's a predictable bump, borrowing money to buy just before the bump and then selling with a small gain just after is profitable. Many buyers doing this will spread the bump out, with an unpredictable width.


Posted by: lw | Link to this comment | 04-22-15 9:26 AM
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Why is outperformance a function of excellent management that needs to be incentivized with enormous compensation on a percentage basis, as opposed to the size of the fund, the opportunities for timing, investment opportunities presented to it, etc.? If the latter is the case, you could reasonably hope to get the same performance at much lower fees by drawing from the (quite large) pool of people that could be expected to perform competently at fund management, as opposed to a much smaller number of superstars. Not at all clear to me why fund management of all things should need to work on a star system.


Posted by: TRO | Link to this comment | 04-22-15 9:30 AM
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My general investing principle is that any idea to take advantage of how stupid the market is has already been exploited by Wall St. leeches.
I had another more complicated one involving inverse ETFs, which match the inverse (or multiple of inverse) performance of the market on a daily basis, which means they compound more rapidly than the index they are meant to mirror which means depending on different sets of changes there should be a way to find arbitrage.


Posted by: SP | Link to this comment | 04-22-15 9:30 AM
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If you need a name for the fund, let me be the first to suggest "Hey, there's some pennies in front of the steamroller."


Posted by: Moby Hick | Link to this comment | 04-22-15 9:31 AM
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64 to 60 and 61.


Posted by: Moby Hick | Link to this comment | 04-22-15 9:31 AM
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And it turns out I'm pwnd by everyone.


Posted by: TRO | Link to this comment | 04-22-15 9:31 AM
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62: Nah, mostly just me.


Posted by: LizardBreath | Link to this comment | 04-22-15 9:35 AM
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In law, since it came up, I personally love a juicy contingency fee case, and they're about the only way to get truly rich as a lawyer, but IMO in the business litigation context they're generally a bad deal for companies bringing plaintiff's side lawsuits.* If you're bringing the case at all, you should have a reasonable expectation of obtaining something, and there's no obvious reason to assign away 1/3 or more of the recovery at the start. A flat fee or (subject to negotiation) hourly fee makes a lot more sense. Nb this is directly contrary to my self interest, but there you have it.

*it's different, of course, for classic contingency fee cases where you're representing someone who is truly too broke to pay fees up front, or for class actions where you're representing no one. For the latter, my view is that plaintiffs' lawyers' fees should be huge in a successful case but that courts should be extremely careful in accepting settlements, since the main risk is that the plaintiffs settle too cheaply by being risk averse and collecting a fee (both defendnants and many plaintiffs lawyers are happy with that arrangement, which is why it doesn't change, but it's not really in the public interest).


Posted by: TRO | Link to this comment | 04-22-15 10:01 AM
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46: The subhead is "Investors Pull $3 Billion From Fund Over Past Year"; the notable thing to me is "By the firm's own metrics, Convexity has fallen short of benchmarks by 2.4, 3.7 and 0.3 percentage points in 2014, 2013 and 2012, respectively, the documents show. Since inception, Convexity has beaten benchmarks by an average of 3.73 percentage points a year." So Meyer, who did enormously well for Harvard managing its endowment starting in the mid-eighties, is starting to have issues. I don't know enough about what he's doing now to know whether this is because the efficient market hypothesis has caught up to the key insight of the Yale Model (that for big institutional money like Harvard/Yale/Calpers, trading liquidity for returns is smart) or something specific to his process. If it's the former, there's probably something to say about the vaguely analogous problems that venture capital seems to be having.


Posted by: snarkout | Link to this comment | 04-22-15 10:06 AM
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New York City and state pension funds have brought in contingent fee lawyers from time to time to recover on bad investments.

http://www.nyc.gov/html/law/downloads/pdf/pr021303.pdf

The effect of these retentions on the value of the pension fudns is debatable, but the effect on the amount of contributions to the State Treasurers' reelection campaigns is very clear.



Posted by: unimaginative | Link to this comment | 04-22-15 10:58 AM
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For most pension funds, the optimal portfolio shouldn't be a pure index. In general, you want high returns when times are bad. NYC's portfolio should be optimized to have high returns when NYC itself is doing poorly. So underweight companies with significant NYC operations and the like (or something more complex).


Posted by: Cable Company Chaser | Link to this comment | 04-22-15 11:52 AM
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My pension fund is managed by in house people who appear to be doing a good job, but management is trying to force them out so we can give our money to Wall Street. The union is not so keen on this plan.


Posted by: Spike | Link to this comment | 04-22-15 11:55 AM
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Wow, didn't know you could say "cunt" in the New Yorker.


Posted by: k-sky | Link to this comment | 04-22-15 12:22 PM
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I can't judge the rest of the argument, but dsquared sure gets this right.

And if history teaches us anything, it's that Americans tend to get upset when public employees are paid millions of dollars--unless, of course, they're college-football coaches

I can't imagine the outrage here if anybody else was geting paid like Urban Meyer. But as it is, we're all just happy that he's staying.


Posted by: | Link to this comment | 04-22-15 12:30 PM
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73 made me look.


Posted by: Moby Hick | Link to this comment | 04-22-15 12:32 PM
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Someone could probably guess that 74 was me.


Posted by: peep | Link to this comment | 04-22-15 12:33 PM
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73: A search of their archive gives me 165 results.


Posted by: Mr. Blandings | Link to this comment | 04-22-15 12:54 PM
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77: "165 Cunts: A Comprehensive Study of Every Time the New York Times Used the C-Word" That would get published somewhere, wouldn't it?


Posted by: peep | Link to this comment | 04-22-15 1:14 PM
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78: if you did it as a poem, The New Yorker.


Posted by: Turgid Jacobian | Link to this comment | 04-22-15 1:20 PM
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77: really hope someone's tracking their search logs today.


Posted by: k-sky | Link to this comment | 04-22-15 1:20 PM
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As long as this is an economics thread, I have a question about this lede from gnoLeD darB:

How is it that people can think that an excess supply of money can show up as an excess demand for financial assets--and thus produce large losses on leveraged portfolios and thus a financial crisis when it unwinds--without also showing up as an excess demand for currently-produced goods and services--and thus as inflation?


I get that there's a faction of economists who refuse to understand the implications of the zero-bound for the relationship between monetary policy and inflation, and have thus made really bad predictions, but the dynamic described here seems separable from that nonsense. It also seems accurate. Is the problem with the hyphenated section?
Posted by: Eggplant | Link to this comment | 04-22-15 1:44 PM
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81: Well right, you need to explain why "excess" money creates a bubble in one category of things people buy with money while leaving another category untouched.

The Keynesians have a story, but the anti-Keynesians don't.


Posted by: JRoth | Link to this comment | 04-22-15 1:50 PM
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Because that excess money is introduced by buying assets, and the market for assets isn't strongly coupled with the rest of the economy, as the owners tend to be wealthy and spend very little. The wealth effect is weak.


Posted by: Eggplant | Link to this comment | 04-22-15 1:57 PM
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The wealthy act as an inflationary sink.


Posted by: Eggplant | Link to this comment | 04-22-15 1:59 PM
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