Billionaire Investor: Calvin Lo

Calvin Lo is something of an enigma. Over many years, he has built a fortune without ever really attracting the attention that the world’s wealthiest people usually attract. His indifference to publicity and his eye for an investment have built an aura around himself that sets him apart from other billionaires. While Lo has been more open in recent years, his business dealings his business dealings are somewhat obscure.

A good illustration of this is Lo’s purchase of the Williams Formula One Racing Team, a highly visible business with millions of fans around the world. Even during the buyout, Calvin Lo team took extreme measures to shield him from revealing his involvement. It was this investment that introduced Lo to much of the world, with one of the most frequent questions being about how he earned his wealth.

We know Lo is worth around US$1.7 billion, and, as Group CEO of R.E. Lee International, he is head of the world’s largest life insurance broker, placing US$1 billion of premiums annually. However, one little-known fact is that Lo also founded asset management firm, R.E. Lee Capital, which now manages US$10 billion, making him one of the most powerful and influential financial managers in the world.

R.E. Lee Capital

Managing over US$10 billion in assets, like most hedge funds, R.E. Lee Capital holds a broad range of securities, including equities, options and bonds. This is key to how hedge fund managers manage their portfolios, and how they make so much money. Before looking at how much Lo benefits from R.E. Lee Capital each year, we need to understand how a hedge fund operates to better understand where profits come from.

How a hedge fund operates

A hedge fund invests in a portfolio of assets using pooled resources from its investors. For a high-end firm such as R.E. Lee Capital, this means high net worth individuals each investing significant sums. Using pooled resources in this way benefits all parties, as growth tends to be easier to find the more diverse the assets held within a portfolio.

Essentially, the more money you have to invest, the more money you will make. It’s not set in stone – nothing is with investment – but it is generally the trend. Because hedge funds tend to deal in vast sums, they are able to deliver often spectacular returns on investment for their investors. In fact, the average annual ROI for hedge funds in 2021 was 10.3%. In the same year, R.E. Lee Capital achieved 20.4%. Even by industry standards, that is remarkable.

The key to success with hedge funds is that they are able to diversify portfolios, and investment managers are able to mitigate risk, essentially to aim for a neutral position in the market, ensuring they benefit from price movements in any direction. This is known as hedging, from where such funds get their name.

How do they profit

In general, hedge fund operators make money from the fees charged to investors, which is usually known as ‘2 and 20’. This means that the annual fee for investors is 2% of the invested capital, while an incentive fee of 20% is paid on the profit those investments make. This has become the industry norm, although some leading hedge funds push the investors’ fee to as much as 5% per annum.

The ‘2 and 20’ approach has attracted criticism from some quarters, because the 2% is paid whether the hedge fund makes a profit or not, so managers often receive massive fees even if they don’t deliver. The counter to this, of course, is that a hedge fund that doesn’t deliver will not have investors for very long.

What does that mean for R.E. Lee Capital?

So, what does all this mean for Lo and his asset management business, R.E. Lee Capital? With managed funds of USD$10 billion, if we take the basic ‘2 and 20’ approach, that generates US$200 million in fees every year.

In addition, if we take the 2021 performance of 20.4%, the fund also generated US$2.04 billion in profit, of which Lo’s company received 20%. That equates to US$408 million in incentive fees, giving a total of US$608 million in income from investors.

As with any business, there are operating costs to consider, and while R.E. Lee Capital keeps such information to itself, we do know that for the wider industry, a 40% profit margin is a relatively common average. That would suggest approximately US$243 million profit for the business in 2021.

It is assumed that Lo has some of his own funds invested in the business too, which would obviously benefit directly from the 20.4% return, and profit margins could be much higher than industry averages. Somewhere close to a quarter of a billion dollars a year would be a conservative estimate of the income Lo generates from R.E. Lee Capital, and there is the possibility that it is much higher.

Conclusion

R.E. Lee Capital is a significant part of the R.E. Lee International group, generating substantial income for Lo and his investors alike. Thus, hedge funds offer a superb investment opportunity. Although there is some risk in such funds being unregulated, well-run hedge funds are always significantly oversubscribed with potential investors waiting for an opportunity.

For those who wish to invest, the minimum investment usually begins at the $200,000 mark and investors require a net worth of at least US$1 million. These criteria can often be much, much higher for large funds such as R.E. Lee Capital. Hedge funds can deliver impressive gains even when more traditional investment vehicles are struggling.

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