Andrew Beer This article as authored by Andrew Beer, CEO of U.S.-based Beachhead Capital Management. You can access the full version by clicking on the link at the bottom.
In this note, we examine the relationship between the hedge fund fee structure and how it impacts alpha.
In the early days of the industry, higher management fees were designed to cover costs of a deep and rigorous
research and investment process; performance fees were meant to reward the manager for alpha generation.
The standard 2/20 fee structure made sense when hedge funds were smaller and either truly "hedged" –
offsetting long and short positions and hence little market exposure – or focused on markets like commodities
where beta alternatives were not obvious.
Over the past decade, several changes in the industry have drawn attention to the issue of whether the standard
hedge fund fee structure is equitable. Today, a good portion of the industry – event driven, equity long/short
– has consistent and identifiable exposure to equity market beta; likewise, as we’ve gained a more
comprehensive understanding of hedge fund performance, it has become clear that more diverse forms of beta
explain the majority of returns. This raises the question of whether investors are overpaying for sources of
return that can be obtained more cheaply and efficiently elsewhere. Finally, the concentration of capital among
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