Senvest: invest in a great hedge fund at a big discount?

I know, I know, you are expecting a follow-up post on my Italian REIFs thesis, but a friend pressured me into looking at Senvest in the meantime. So blame him if this isn’t what you wanted to see ;). Anyway, the investment case for Senvest appears to be compelling. The company has a big investment in its own funds and a reported book value/share of CA$221 at the date of the latest quarterly report while the stock is currently trading for CA$166. This already represents a 25% discount, but the picture is probably a lot better because the main fund of the company has performed great in the subsequent five months.

NAV/share of the Senvest Partners fund increased 23.3% between 30 September 2014 and 28 February 2015. We can use this return as a crude measure to approximate the current book value per share of Senvest. Doing this gives us a book value of ~CA$272/share which implies a 40% discount. But it gets even better: those returns are measured in US$ while the company reports in CA$. With the US$ appreciating approximately 12% versus the CA$, we could be looking at a book value of ~CA$305/share and a discount of ~45%. That sounds pretty great for a hedge fund that has generated a >20% return since inception in 1997.

Figuring out if the company is a good deal at that discount should be a relative straightforward exercise. The value of their investments can be approximated by taking the current value, add a premium for estimated future alpha while applying a discount for operating costs and tax inefficiencies. The value of the business itself can be based on the amount of fees they generate. It’s a simple business model to understand, in theory…

Understanding Senvest

Unfortunately, the reported financials of Senvest are one major clusterfuck because they are required to consolidate their funds with the operating company. One of the results of the consolidation is that the management fee that flows from the funds to Senvest disappears since it is now an intra-company transaction. At the same time costs that were payable by outside investors appear on the income statement of Senvest. Economically it is of course not changing the situation: it just makes it harder to understand.

I think that the fees earned and the costs shared with outside investors are now reflected in “change in redemption amount of redeemable units”. But since the value of these units also change based on the returns of the fund it just becomes a gigantic mess. I don’t think it is possible to extract from the current financial statements the effective amount of the management fees that flow from outside investors to Senvest, nor is it possible to calculate what percentage of the incurred costs are paid by outside investors. But perhaps it’s my limited accounting knowledge that is the problem here, so if I have a reader that knows how to figure this out I’m all ears! Because what I want to know is basic: what kind of TER are you paying if you buy assets through Senvest?

Luckily the consolidation of the funds into Senvest is a new development, so we can just look at the income statement of Senvest for the year 2012 to get an idea of the costs of running Senvest. The funds lost money in 2011 and ended near the high watermark at the end of 2012, so it’s a good year to evaluate since it should represent, to some extent, fixed annual costs:

Income statement 2012

You can see the effects of the consolidation in the income statement. Total costs for running the company and the funds were CA$21,7 million and CA$3.3 million of those costs were borne by outside investors while the company also earned $2.7 million in management fees. Unfortunately (for us) those fees don’t all accrue to shareholders since the CEO of Senvest, Richard Mashaal, receives 40% of the annual fee through his ownership of the entity that acts as an advisor to the Senvest Master Fund and Senvest Israel Partners fund. This is however not visible in the above statement since it is accounted for as income attributable to non-controlling interests. So shareholders effectively only got CA$1.6 million in management fees.

If we add this all up we get effective annual expenses of CA$16.8 million of which $CA6.1 million are operating costs for the funds (interest, transaction costs and other expenses) while the remainder are the net costs of the employees running the fund. With an starting equity of CA$285 million and an ending equity of CA$359 million in 2012 that turns out to an total expense ratio of ~5.2%. You need to generate some serious alpha to overcome this hurdle!

And remember: this is in a year where the company didn’t earn, but also didn’t pay a lot of performance bonuses. When we look at 2013 there are almost CA$60 million in costs. If we adjust these costs based on the same split as in 2012 we get the following picture:

Senvest operating costs 2013

The high costs are mainly the result of the fantastic performance of their funds in 2013. The good news is that Senvest also generated CA$18 million in management fees for net yearly operating costs of approximately CA$34.8 million. During 2013 equity increased from CA$359 million to CA$630 million, which gives us an implied TER of 7.0%. A bit higher than in 2012, but it seems that the majority of the bonus payments can be netted out against the 1.5% + 20% fees that are payable by outside capital. Note that these numbers are without accounting for taxes. In 2012 and 2013 taxes accounted for respectively 1.0% and 2.5% of average equity.

Conclusion

Given Senvest’s track record it appears that they are worth their money since they have generated an annualized return of more than 20% since 1997. Unfortunately, the possibility that some manager is capable of generating alpha is not something I want to pay for since the base rate of this being true is extremely low. And while Senvests results sound great their strategy appears to be leveraged long, so risk-adjusted it’s probably less impressive.

When we see Senvest as an investment fund with a TER that varies between 5% and 10% the current discount suddenly looks a lot less attractive. It’s really unfortunate that they don’t have enough outside capital to generate a decent management fee that can offset their operating costs. I love buying assets at a discount, but not with this cost structure.

If you think that Senvest is capable of generating enough alpha to offset their expenses (or better) the company is probably a great investment at the current price point. Certainly could be the case! I’m not going to bet on it though.

Disclosure

No position in Senvest

33 thoughts on “Senvest: invest in a great hedge fund at a big discount?

  1. frommi

    Are you sure that the expenses are not expenses for the fund and therefore should not be divided by equity but by the whole fund size?
    By my understanding 60% of the profits go to Senvest, so as soon as more than 50% of the money in the funds is from outside investors Senvest pays no fees anymore but generates additional income on the funds. And they were able to raise additional money in the last years and given their performance will very likely be able to do it in the next 1-2 years. You probably want to check out the articles on Seeking Alpha (Ticker SVCTF) or the thread on CoBF for more information. Nate at oddballstocks had an article on them in 2013, too.

    I can`t help but buying an index fund at a 50% discount is already a big deal, but getting market beating results at a 40-50% discount is so good, that i can`t see how i can pass on that. (And in fact i have 20% of my capital in SEC.TO)

    Reply
    1. Alpha Vulture Post author

      No, you can clearly see in the 2012 financial what fund expenses are and what expenses are at the Senvest corporate level. Where you are going wrong in your thinking is taking a shortcut by thinking that if 50% of the funds is from outside investors and 50% of the funds is from the company itself is that it doesn’t pay fees anymore.

      The problem is that outside investors pay 1.5% + 20%, but Senvest pays 100% of employee expenses and associated bonuses while only other expenses such as trading costs are split with outside investors in the fund. Senvest doesn’t pay 1.5% + 20%! They pay the companies operating costs. In addition to this Senvest only receives 60% of the management fee that is payable by outside investors while the CEO gets 40%.

      There is absolutely no reason why one side of the equation should equal the other side of the equation here, and in this case, the amount of fees generated by outside money is absolutely not enough to offset operating costs. In 2012 they generated CA$1.6 million in management fees while they had CA$18.4 million in costs! That’s not even close to getting break-even…

      And yes. I’m aware of what has been written about this company by others on the internet. I think most of them don’t understand the cost structure…

      Reply
      1. frommi

        After looking at this you are probably right, but its still not that big a drama. I compared equity gains in 2013/2014 with the hedgefund returns, and they are pretty close. But it can get better in the future because the outside money is compounding and they raise additional money. So while we may not get gross returns yet, we still get better returns than the guys that invest in the hedge fund and when the discount closes, its a homerun.

        When you compared it to a stable NetNet at 50% of NCAV, this business is still a lot better deal even if it only grows with the market or slightly slower.

        Reply
        1. Alpha Vulture Post author

          I did a quick check on the data for the first 9 months of 2014.

          In this period the Senvest Partners fund gained 5.4% in USD which is 11.2% when we translate this to CAD. In the same the period book value of Senvest increased by 9.5%.

          So this confirms my idea that when you invest in Senvest you are effectively paying more than fund expenses plus 1.5% + 20% in management fees. You are paying more than outside money! And it’s not exactly like 1.5% + 20% is cheap to begin with: you need to generate a lot of alpha to be worth those fees. And don’t forget: in addition to those fees you also have fund costs (trading, interest, administrative) and tax inefficiencies!

          They might be able to deliver enough alpha to be worth it, but make no mistake about it: you need that to make this investment work.

          Reply
          1. frommi

            Where can i lookup the hedgefund performance in US-$?
            I am still not 100% sure if the information on their website for the NAV is in CAD or $. I thought it was in CAD.

          2. frommi

            Thanks for all your info, that makes the discount bigger than i thought but the future prospects worse. Still 30-40% upside to the historical P/B range.

  2. pietje

    Great post. I’m glad somebody “pressured” you into doing this 🙂 I guess I am forced to re-evaluate my positon. Will do so after the annual comes out – should be soon.

    Maybe a slightly more accurate way to analyse the company is to value the 60% stake in RIMA separately? Wouldn’t really change the thesis though.

    Reply
    1. Alpha Vulture Post author

      The big question is: why wait after the annual comes out? Not quite ready to deal with the cognitive dissonance?

      And yes, you could value the RIMA stake separately, but it wouldn’t change anything. You get a piece that is worth something, but the flipside is that you also have to recognize higher costs. I simply netted the operating costs at Senvest and income from RIMA.

      Reply
      1. pietje

        Small bet that the market likes earnings more than I do. In the meantime I can figure out where to park my money.

        Reply
  3. Jim Rivest

    “In this period the Senvest Partners fund gained 5.4% in USD which is 11.2% when we translate this to CAD. In the same the period book value of Senvest increased by 9.5%.

    So this confirms my idea that when you invest in Senvest you are effectively paying more than fund expenses plus 1.5% + 20% in management fees. You are paying more than outside money!”

    AV, you are correct that Senvest Partners has outperformed parent Senvest, but I think comparing their respective performances to determine costs is a bit misleading – it’s not an apples to apples comparison. You could have chosen their other hedge fund (Senvest Israel) during this same time period measured and come up with a different conclusion. Senvest Israel had a negative return of -7.4% over that same period, even though they also have compounded at 20%+ over the life of the fund. Senvest also invests in other investments vs. the HF’s (private REIT’s, bank recaps such as Talmer and Cypress, Argentinian real estate, etc..) .

    Unlike you, I don’t think you can go wrong over the long term with either investment, but I threw my hat in the ring with parent Senvest.

    Senvest Partners has annualized 20.6% since inception (4-1-97 through 12-31-13).

    While parent Senvest’s BVPS has grown at a more moderate 18.5% clip the past 19 years.

    $7.95/share ——-1994
    $17.94/share——1999
    $23.16/share——2004
    $87.98/share——2009
    $201.69/share—- 2013

    These are l-o-f returns for Partners and book value growth per share since inception for Senvest,. So measuring different things over different time periods, so certainly not directly comparable, but you get the idea. Since I could have invested in Partners with higher historical returns why did I choose Senvest?

    A taxable LP in Partners is on the hook to pay taxes every year. That 20.6% historical return gets significantly nicked each an every year. While Senvest’s 18.5% BVPS growth is after tax (27% statutory tax rate, which they don’t come close to paying in real cash, but destined to go up in 2015 as the Canadian tax rules are changing).

    The way I looked at this investment is while I’m not a fan of high compensation for asset managers (including Senvest), none of these guys work for peanuts and it’s what you net that counts. Buying a security that compounds BVPS annually at 18.5% (and I often get to buy it at a 40% discount to that book) is quite rare.

    In addition, I also have optionality in that 3rd party assets should eventually grow substantially. Institution are not banging on the door to invest billions in such a volatile fund, but my guess is over time they will draw more assets or eventually grow enough organically that fees collected actually become meaningful (they haven’t been to date). There have to be others out there willing to accept high lumpy returns vs. steady lower returns.

    If you play with the numbers, a couple of billion in 3rd party fees capitalized could move the stock. That is just the cherry on this sundae though and not required for an investment in Senvest.

    Reply
    1. Alpha Vulture Post author

      Me comparing the performance of the past nine months is, of course, a bit arbitrary, but that’s the only time period for which I could easily find the performance of the Senvest Partners fund. And as far as I understand this fund is way bigger than their other funds. But it’s just a shortcut anyway, the cost structure evaluation in the blog post itself should count for more.

      With regards to buying a security that compounds at 18.5%. Sure, that’s absolutely great. But two important questions:

      1. How good are these returns on a risk-adjusted basis? I know almost nothing about their fund, their strategy, sharp/sortino ratio’s and max drawdowns. Seeing good historical returns isn’t enough for me to conclude that they are adding alpha. To me, it seems that the good returns could predominantly be a function of adding leverage.

      2. How much alpha can we realistically expect from a good hedge fund manager? For Senvest to continue returning 20%+ after fees they have to generate something like 30% before fees! That’s pretty insane.

      PS. Can’t comments on the taxes since you are without a doubt in a different position than me. Could certainly be a valid reason for choosing the lower performing option (pre-tax).

      PS2. Yes, more 3rd party fees offer some nice optionality. But you have to wonder if they can’t/won’t attract a decent amount of outside money after almost two decades of returning 20%+: what will it take?

      Reply
      1. Jim Rivest

        “How good are these returns on a risk-adjusted basis? I know almost nothing about their fund, their strategy, sharp/sortino ratio’s and max drawdowns. Seeing good historical returns isn’t enough for me to conclude that they are adding alpha. To me, it seems that the good returns could predominantly be a function of adding leverage.”

        Senvest Partners is a long/short fund that does employ leverage and concentration. They are usually net long somewhere between 50%-150%, (depending on market conditions and individual valuations), but I personally haven’t seen either extreme hit, so often net long 100%-125%. They concentrate, as top 10 positions are often 50%+ of equity and top 20 are 75%+. I’m afraid I don’t even know what sharpe/sortino ratios are, but on a risk-adjusted basis, employing a bit of leverage does introduce more risk/reward to the investment. Most hedge funds employ some leverage and many do much more than this. Very few HF’s have their long term record (20%+ for both funds), so I think it fair to say they do add ‘alpha’.

        “How much alpha can we realistically expect from a good hedge fund manager? For Senvest to continue returning 20%+ after fees they have to generate something like 30% before fees! That’s pretty insane.”

        No argument here, I agree. If capital significantly increases, 20% net annualized will be history in the future.

        However, Bill Ackman’s letter to PSH shareholders makes the case for his permanent fund to trade at a significant premium if an investment can maintain mid to high teens ROE’s.

        “Over time, we believe that if we continue to generate attractive rates of returns, PSH should trade at a premium to its NAV or book value (the book value of PSH equals its NAV because we mark our assets and liabilities to market).

        A screen of all public companies worldwide from 2004-2013 that have earned from 20-25% returns on equity yields 190 companies with a median market cap of $7.5 billion that currently trade at a median price-to-book ratio of 3.5 times.

        Companies which have earned mid- to high-teen returns on equity over this same period also trade at substantial premiums to book value. Doing the same screen for average ROEs of 15-20% yields 380 companies with a median market cap of $6.1 billion that trade at a median price-to-book ratio of 2.7 times.”

        So in the future, even if Senvest’s returns are lower than historical averages, I don’t think a 40% discount for parent Senvest is the right valuation.

        “More 3rd party fees offer some nice optionality. But you have to wonder if they can’t/won’t attract a decent amount of outside money after almost two decades of returning 20%+: what will it take?”

        I’m patient. Institutions won’t like the volatility, so I’m not holding my breath there, but HNW individuals and family offices may come around with funds allocated in their direction. These aren’t an all-weather funds, but based on history, you can make the case (and they are making the rounds) , that some capital should be invested in Senvest HF’s. And if it never happens, ‘smallish’ money will likely continue to do very well, so intrinsic value at the parent goes up every year. Investors get wealthier more slowly.

        Reply
        1. Alpha Vulture Post author

          I’m afraid I don’t even know what sharpe/sortino ratios are, but on a risk-adjusted basis, employing a bit of leverage does introduce more risk/reward to the investment. Most hedge funds employ some leverage and many do much more than this. Very few HF’s have their long term record (20%+ for both funds), so I think it fair to say they do add ‘alpha’.

          Usually leverage reduces risk-adjusted returns because you have to pay interest to get it but your return on assets remains the same. Most hedge funds employ leverage but are often also hedged to some degree which results in a net long exposure that is a lot lower than 100%. They are called hedge funds for a reason.

          Knowing almost nothing about their strategy and how they accomplished those returns it is IMO hard to say something about their alpha generating abilities. Perhaps their good annualized returns are mostly the result of a few good bets in the early years when the fund was presumably a lot smaller. Perhaps their good returns are a function of underlying risk factor that has trended in a certain direction the past two decade (maybe declining interest rates?).

          Generating high returns going forward in a zero interest rate environment while the asset base is significantly larger might not be repeatable. And you also have to realize that a 1.5% fee is a lot higher in a low-interest-rate environment than in a high-interest-rate environment. Paying 1,5% when stocks are expected to return ~10% in the long run isn’t the same as paying 1,5% when stocks are expected to return ~5%.

          Reply
    2. bovinebear

      Hi Alpha,

      I think you are mistaken in your claim that “when you invest in Senvest you are effectively paying more than fund expenses plus 1.5% + 20% in management fees. You are paying more than outside money!” The reason is that senvest is a closed fund. When I paid CDN$162 for the shares, I am not letting senvest deploy that money in the funds. I am simply replacing an existing holder of the fund. The claim on the book value of that fund can be calculated from the price to book ratio which is about 1.5x. And that is why regardless of the argument against the fees (which is very confusing for us all).

      Consider the extreme case, where everyone thinks senvest is crap and the shares go to $1. Then at 2.8 million shares the market cap is $2.8 million. Then you can see that $2.8 mil invested can give a book gain of $9mil. that is like a 300% gain. Again it is about the price to book ratio, your above statement is true if the price to book ratio is 1x.

      Reply
      1. Alpha Vulture Post author

        You are certainly paying those fees, and if you invest at a discount you actually pay more per dollar invested. Let’s say you pay a 5% TER when you invest $1 when it is trading at book value. When you invest that same dollar when it is trading at a 50% discount you buy $2 worth of assets and you have to pay fees on those two dollars, so you could argue that you now pay a 10% fee! The flipside is that you now also have a claim on the returns of $2 worth of assets instead $1 worth of assets. Depending on your return assumptions that might offset those fees, might be way more than those fees, or it might be less than those fees.

        I think you should try to separate the fees you are paying to the fund manager and the discount the vehicle is trading at: otherwise you are making thing needlessly complex.

        Value Senvest:

        1. Calculate fee structure
        2. Estimate alpha
        3. Calculate appropriate discount/premium based on fee structure and alpha
        4. Compare with current market value

        Reply
  4. frommi

    I looked at the numbers again, and i think you made a mistake in assuming that the 40% of Richard Marshalls part of the fee is in “income attributable to non-controlling interests”. This number is negative in Q3 2014. For me it looks like RM 40% are in employee benefit expenses. The management fee that the outside investors pay is not visible because it is hidden in investment gains/Liability for redeemable units.
    I still come to a TER of 6% for 2013 and 5% for 2012, but because they had a lot of capital inflows at the end of 2013 for 2014 the current TER stands at around 2% without the last quarter. And because of the compounding of the outside capital for Q4 the TER is around 0% for Q4. In 2015 they should start earning money on outside capital, even if they don`t raise additional capital.
    Going forward only in negative/low income quarters the investor in the stock has expenses, because the 1.5% fee of outside investors is still not enough to offset the fixed costs.

    I am really looking forward to the next statements to see if my assumptions are true.

    Reply
    1. Alpha Vulture Post author

      I looked at the numbers again, and i think you made a mistake in assuming that the 40% of Richard Marshalls part of the fee is in “income attributable to non-controlling interests”.

      No, the fee is part of income attributable to non-controlling interests, but it is not the only thing that gets aggregated in that line item. Richard Mashaal has reinvested some of the fees that he has earned back in he hedge fund, so the mark to market gains and losses of his investment also flow through this line item. As a result income attributable to non-controlling interests will be higher than the 40% of the fees when the funds gain in value and it will be lower (and possibly negative) when the funds lose value.

      How did you calculate the current TER? Not sure how you arrive at 0% for Q4.

      Reply
      1. frommi

        Fee from outside capital in that quarter should be roughly 15 million, and when you look at Q1 that should roughly equal expenses in that quarter. But of course this assumes that RM`s 40% are under expenses. According to finance.yahoo.com RM got 21M in 2013, 9M of that was from the bonus pool and his base salary is 370k. The missing 12M fit pretty good to the 40% of the fee on 143M they had in outside capital at the start of 2013. 143*0.95 (gross return 2013)*0.2(fee)*0.4(RMs 40%)=11M. Why are you so sure that his 40% are in income attributable …?

        Reply
        1. frommi

          Ups, outside capital was 190M at the start of 2013, but the fee is still in that ballpark. Outside capital is now probably 3-4 times higher than in 2013.

          Reply
  5. Dr. Daniel Silverstein

    You make a good point. Fees are high. High fees make it more difficult to deliver above market returns. It’s a salient point and argues for a discount to NAV.

    But there are other considerations. Few hedge fund managers have equaled Senvest’s long term results. Outstanding mangers arguably deserve higher fees. Such funds arguably deserve to trade at a premium to NAV.

    It’s true, volatility is high. But what is better, a low volatility below market return or a lumpy above market return? I would argue the latter.

    Given Senvest’s long term track record of market beating returns despite the high management fees, I think it makes sense to consider it having a place in one’s portfolio’s. Simply compare one’s personal track record and compare it with Senvest’s. True, there is no guarantee that Senvest will continue it’s out performance, but that is true of everyone and every investment.

    It’s been said, “There are no bad stocks, just bad prices”. Judging from the past 10 years it seems difficult to make the case that Senvest has been a bad company or a bad investment. Judging from recent performance, there is no evidence that management has lost their ability to invest wisely. Why then such a punitive discount?

    Despite having appeared in several blogs, I think Senvest is an obscure company. It’s thinly traded. It wouldn’t require a huge hurdle for the discount to narrow. I’ll patiently wait, and hopefully receive above market returns in the interim. Isn’t that what value investing is all about?

    Reply
    1. Alpha Vulture Post author

      It’s true, volatility is high. But what is better, a low volatility below market return or a lumpy above market return? I would argue the latter.

      That depends if there is a risk-adjusted performance difference. Otherwise you could simply buy the low volatility below market return, add leverage and get the high volatility above market return. You don’t want to pay a lot for someone who just adds leverage since everybody can do that.

      Reply
  6. Jim Rivest

    Alpha, the hedge funds and parent Senvest usually run 100%+ net long, which looks to be their default position. To my way of thinking that adds both risk and reward. Their history also demonstrates that as the downdrafts are deeper and the upswings are of far greater magnitude than the ‘market’.

    Richard Mashaal receives 40% of the 1.5% management fee and 20% of the carry for 3rd party capital in the hedge funds. Parent Senvest does not pay any fees for their invested capital in the hedge funds. Senvest in turn receives fees for their sub-advising the funds (60%) and it’s added to their revenue.

    No one is arguing the management isn’t very well paid, but deservedly so. The LP’s of the funds are netting ~20%, so they shouldn’t gripe about paying RM and Senvest. Instead of extrapolating Senvest’s compensation scheme and assuming they are higher than the funds, a look at their proxies might in order.

    Their base salaries are relatively small and haven’t been raised since 2006, but the 3 senior execs DO split a 7% pre-tax earnings bonus when certain targets are hit. They have to outperform by a significant degree though to get the full 7% bonus.

    Senvest makes the point that overall compensation for U.S. investment firms is usually 30%-50% of revenue, and they were compensated just 12% of revenue in 2012, and 9% in 2013. That is true, but it’s split among a really small staff and most of the revenue stems from returns on the firm’s own capital, not fees generated by other capital, so the 30%-50% comp is a bit misleading. Still, I much prefer Senvest’s base salary and bonus pool compensation compared to the hedge fund fees paid. I have no problem paying an additional 3.5% bonus over a meaningful hurdle rate vs. a flat 20% carried interest at the hedge funds. If Senvest was compensated like their hedge funds, compensation expense would be considerably higher.

    2013 proxy:

    “As the philosophy of the Board is to place more emphasis on annual performance bonuses as opposed to base salary as a means of compensating the Named Executive Officers, the Named Executive Officers have not received any increases in their base salaries since 2006.

    The amount of the Bonus Pool is determined based on two components. Under the first component, 3.5% of the Company’s pre-tax income allocated to common shareholders is contributed to the Bonus Pool. Under the second component, up to a further 3.5% of the Company’s pre-tax income allocated to common shareholders may be contributed to the Bonus Pool based upon the return realized by the Company on its investment portfolio (the “Company Return”) as compared to the return realized by a basket of indices comprised of the S&P 500, the Nasdaq Composite Index and the Russell 2000 (the
    “Benchmark Return”), being indices whose composition broadly reflects the composition of the Company’s investment portfolio. Specifically, in order for the full 3.5% of pre-tax income allocated to common shareholders to be contributed to the Bonus Pool, the Company Return must exceed the Benchmark Return by at least 35%. For example, if the Benchmark Return is 20%, the Company Return must be 27%. Partial allocations are made if the Company Return exceeds the Benchmark Return by less than 35%.

    For the financial year ended December 31, 2013, the Benchmark Return was determined to be approximately 35%. This was calculated by allocating a weighting of 25% to the S&P 500, 50% to the Nasdaq Composite Index and 25% to the Russell 2000. The Company Return for that same period was over 70%, which was more than double the Benchmark Return. Therefore,
    the Bonus Pool for the 2013 financial year was set at the full 7% of the Company’s pre-tax income allocated to common shareholders, and was rounded to $16,000,000.

    The proportion of the Bonus Pool to be distributed to each executive eligible to receive payments thereunder is determined at the discretion of the Board based on the perceived contribution of each to the financial performance of the Company, as opposed to any mathematical formula. For the financial year ended December 31, 2013, the amount of the Bonus Pool distributed to each of Victor Mashaal, Richard Mashaal and Frank Daniel was $6,000,000, $9,000,000 and $1,000,000, respectively.

    In determining the amount of bonuses to be awarded both individually and in the aggregate, the Board also takes into consideration the overall compensation paid by the Company relative to its revenue. A common matrix used by U.S. investment firms is to express compensation as a percentage of revenue. Historically in the financial sector, this percentage has ranged between 30% and 50%. In the case of the Company, for the financial year ended December 31, 2013, the ratio of employment benefits and share-based compensation to total revenue and investment gains was approximately 9%. While the Company does not have the same employee count or overhead of the larger U.S. investment firms, the Board believes that the Company’s relatively lower compensation to revenue ratio nonetheless serves to confirm the reasonableness of the Company’s compensation levels.

    Finally, the Board also takes into consideration the increase in equity accruing to common shareholders of the Company. As at January 1, 2013, the common shareholders’ equity of the Company was approximately $331 million. This increased to approximately $565 million as at December 31, 2013, resulting in a 70% return on common shareholders’ equity. This return was far in excess of the Benchmark Return discussed above.”

    Reply
    1. Alpha Vulture Post author

      Still, I much prefer Senvest’s base salary and bonus pool compensation compared to the hedge fund fees paid

      I think their bonus compensation structure is fine. But it sucks that base salaries are pretty high compared with AUM. I don’t like paying 20% with no hurdle rate. But paying 1.5% is a better deal than paying fixed costs at Senvest since that is something like ~5%. And since that is so high I would rather pay 1.5% + 20% because that’s not going to kill you when there is a prolonged period of mediocre returns: a possibility for even the best fund managers.

      Reply
  7. Josh

    I know this post is a few months old but just got around to really looking at the Senvest numbers.

    Most of the expenses (employee comp) in 2014 was performance related (approx 24M of 31.5M) because of fund performance. If the fund returns 0% this year, employee comp will go way down.

    Expenses are still high overall but with the discount to book I am comfortable with expenses.

    Reply
  8. pietje

    2016 Master fund net results in USD: ~23%.
    2016 Senvest common BVPS in CAD: ~9.5%.
    CAD/USD during the year: ~3%.

    Reply

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