There is speculation that Franklin Templeton’s Mark Mobius is planning to open a hedge fund. Mark Mobius is a very successful long-only mutual fund manager. He doesn’t have a secret formula for investing. He is a long-term emerging market bull and he doesn’t have much experience as a short seller. So why would he want to open a hedge fund?
Mutual funds make money through marketing and sales. Whenever they have some alpha, they increase their assets under management and secretly follow index funds. Mutual fund investors are lucky if they could make 50 or 100 basis points of alpha. Usually their alpha falls below zero after accounting for fees and expenses.
Hedge funds usually make money through incentive fees. There are two reasons for this. First, they can’t manage to raise billions of dollars that will provide enough management fees to run their businesses. Second, their strategies can’t handle billions of dollars without compromising their alpha. So they close their funds after they reach a certain size. We doubt that Mark Mobius is in possession of such a high alpha strategy that it can manage billions of dollars.
Mark Mobius is probably regretting the fact that he wasn’t a hedge fund manager earning billions over the past 10 years when emerging markets went through the roof. He forgets that investors won’t be very eager to surrender 20% of their returns to a hedge fund manager who consistently invests in emerging markets. He needs to prove to his investors that he can time his investments in emerging markets. Most people, including Warren Buffett, thinks that hedge fund investors are dummies who surrender their millions to hedge fund managers without doing any due diligence (see Warren Buffett‘s stock picks). But the spotlight should be on mutual fund investors instead. They are the gullible ones; their wealth has been destroyed during past decade. The same can’t be said of hedge fund investors’.