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Alternative Market Briefing

Other Voices: Debate on hedge fund fees masks the larger issue - not all hedge funds are invested in 'hedge fund strategies'

Thursday, August 06, 2009

The following was written by Rene Levesque (CFA), founder of www.mountjoycapital.com:

There is nothing wrong with the hedge fund fees

Indeed, there is nothing wrong with the prevailing hedge fund fee structures. The current debate on fees will likely lead nowhere. Simply, the debate is rather symptomatic of the frustrated investor who allocated money into hedge funds but failed to recognize that not all hedge funds engage into "hedge fund strategies". As well, they have failed to recognize the mechanics allowing the generation of absolute returns within the manager screening process.

Investors allocate capital to alternative investments to derive alternative returns. In the case of hedge funds this should translate into absolute returns and protection of capital in times of broad equity draw-downs. There should not be any debate on fees if the core return objectives (net of fees) are met within this industry. The debate should rather be directed at the root of the main problem that plagues the hedge fund industry: not all of them deploy hedge fund strategies.

The current issues perhaps, or at least in part, stem from the low volatility environment of 2004-2005. Investors were lured by a combination of evils in the search of returns. Such evils included: fringe markets, eclectic strategies, going down the liquidity spectrum, implied short volatility, implied short gap risk strategies, and i......................

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