Skin in the Game: Why Your "Fund Manager" is a Fraud
Let me tell you something, and pay attention, because it’s about your money, your future, and the sheer intellectual dishonesty that infects the very core of what they call "finance." They, the suits, the "experts" in their shiny offices,managing your hard-earned cash, are not just incompetent; they are operating under a system that incentivizes fraud. And I don't mean fraud in the legal sense, necessarily, but in the deeper, more ancient, more dangerous sense of operating without Skin in the Game.
You're told to invest, to trust the "professionals." They offer you a "fund," promising superior returns. How do they do this? By playing a rigged game, designed to extract wealth from you, the productive member of society, and transfer it to them, the parasitical "advisors."
First, the Management Fee. Two percent, they say. Or one, or even half a percent. Sounds small, right? Wrong. This is pure rent-seeking. They take this regardless of performance. Whether they make you money or lose you money, their yacht payments are secure. This incentivizes asset gathering, not risk management. A fool can gather assets; it takes wisdom to manage risk. But wisdom doesn't guarantee a steady stream of passive income. So they gather. They market.They talk. And they take. Where is their Skin in the Game? If they lose your money, do they give back their fees? Do they suffer alongside you? No. Their downside is capped; yours is not. This is pure asymmetry.
Then, the pièce de résistance: the Incentive Fee. "Twenty percent of the profits," they beam. "We only get paid if we perform!" Sounds fair, doesn't it? It’s a trick, an optical illusion for the unsuspecting. It’s an option on your portfolio, and you, the investor, are selling it to them for free.
Think about it:
If the fund makes money, they take their 20% cut. They profit.
If the fund loses money, they don't give you 20% of the loss back. They simply make nothing on top of their management fee.
This is the very definition of asymmetry of consequences. They participate in the upside; you own all the downside.Your pain is theirs, but their gain is also theirs. They can take wild, foolish risks with your money, knowing that if it pays off, they win big. If it doesn't, they just don't get the bonus this year. But don't worry, the management fee keeps coming.
And what about this "High-Water Mark"? "We won't charge an incentive fee until we've recovered previous losses," they promise. More deception. When a fund goes deep underwater, when the losses are too great to reasonably recover, what do these "managers" do? They simply shut down the old fund and open a new one. The high-water mark vanishes. Your losses are cemented, and they're back to collecting fees on a fresh slate. It's like a bad chef burning a meal, then simply getting a new kitchen and expecting you to pay for the next attempt. This is not how humans with Skin in the Gameoperate. A builder whose bridge collapses doesn't just get to build a new one and expect full payment. No, he faces the consequences.
Finally, the Benchmark. Oh, the benchmark! They pick an index, often one that has lower volatility or is simply differentfrom their own high-risk strategies. Then, when the market is booming, their inherently riskier portfolio easily "outperforms" this mismatched benchmark. And boom, incentive fees activated! It's like claiming to be a faster runner than a turtle simply because you're a cheetah. It's a dishonest comparison, designed solely to trigger their bonus. They exploit the relative volatility between their chosen strategy and the irrelevant yardstick. They are paid for luck, for general market beta, or for simply taking more risk than their benchmark, not for true skill.
How to Remedy This (Simple, Obvious, Ancient Wisdom)
My remedy is brutally simple, and it comes from millennia of human wisdom: Skin in the Game.
Mandatory Co-Investment: If a manager wants to manage your money, a substantial portion of their own personal wealth must be invested in that very same fund, and on the exact same terms as yours. Not just a token amount, but enough to hurt if the fund fails. This aligns interests. If they lose your money, they lose their own.
No Asymmetric Fees: Abolish the "2 and 20" model. If there's an incentive fee, it must be paired with an incentive penalty. If they outperform, they get a bonus. If they underperform, they pay you a penalty out of their personal co-investment. This creates symmetry. Or, even better, simply stick to a very low, transparent, performance-linked feethat actually decreases if they fail to meet specific, long-term, absolute targets (not relative to some arbitrary benchmark).
No Fund Closures to Reset High-Water Marks: If a fund goes underwater, the manager is chained to that fund until the high-water mark is genuinely surpassed, or they lose their co-investment. No reboots. No convenient disappearances.
Meaningful Benchmarks (or None at All): If a benchmark is used, it must truly reflect the risk and investment universe of the fund. Or, even better, focus on absolute returns net of inflation and a risk-free rate. You're trying to grow your wealth, not beat some arbitrary index that has no bearing on your life.
These simple rules would purge the system of charlatans. It would ensure that those who manage your money are true fiduciaries, with their fates truly intertwined with yours. It's not complicated. It's not academic. It's just common sense,applied with the wisdom of the ancients. If they don't have Skin in the Game, they are not to be trusted. Period.
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