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Alternative Market Briefing

Other Voices: Hedge fund fees are on the rise, and that's good

Friday, December 01, 2017

by Stephen Scott, Partner, BRI Partners

Don't worry: investors will end up paying less - and here's why:

The conventional wisdom is that everything on Wall Street gets cheaper over time. From trading costs to management fees, capitalism forces competition and efficiency.

In the hedge fund industry, with performance lagging since the financial crisis of 2008, it makes sense that everyone is talking about fee compression and better terms for investors. Almost every day you hear that the days of 2 and 20 are over.

CalSTRS Chief Investment Officer Christopher Ailman, on CNBC's "Squawk on the Street,"recently said, "Two and 20 is dead. People have to understand that. That model has been broken."

He's right. 2 and 20 is dead. Welcome to the days of 3 and 30.

The initial downward price pressure

When the technology bubble burst in 2000, institutional investors had little to no exposure to alternatives. When sifting through the wreckage of their portfolios and in need of risk mitigation, they noticed that the university endowments fared markedly better during the decline due to their large allocation to alternative investments.

When the bubble burst and the S&P 500 was down almost 15%, the average university endowment was down only about 3.5%.

A report by the Center for Social Philanthropy and Tellus Institute found that:

"Because endowments such as Harvard and Yale had limited their exposure to domestic public equities, th......................

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