Aug

14

What is the difference between a professional and an amateur investor? One way of distinguishing the two is via management fees, the pro trades other peoples money with a structure of fees whilst the amateur trades his own money.The phenomenon of funds charging fees whilst underperforming the index is well known to all of us. Fairer funds will charge on profits only, but even here there is a problem. A fund that breaks even after a down year and an up year is much worse for investors than one that breaks even in both years. This is because of the charges on profits whilst not returning money to investors if the fund loses.

What effect will this have on professionally managed money? I believe there will be a bias in favor of accepting greater risk, just as weekend chess tournaments (typically with 3 prizes) foster a high risk strategy with volatile outcomes.

Is this good for investors? I do not think so, and frankly the hairs on the back of my neck stand up whenever I see advertised ‘bonuses on profits’. Markets are hard enough (monkeys with darts beating ‘pros’ most of the time) without giving people bonuses for achieving volatile results.


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