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Andrew Beer This paper was authored by Andrew Beer, founder of Beachhead Capital Management LLC, New York. You can download the full white paper here.

Investors and managers find themselves at an interesting inflection point in the evolution of the hedge fund industry. The growth of liquid alternatives has focused attention on what happens when talented hedge fund managers are asked to manage money within the constraints of a mutual fund structure. The results so far are disappointing: alternative multi-manager mutual funds underperformed the HFRI Fund of Funds index by close to 200 bps in 2014, despite a 200-300 bps fee advantage (and, as noted in a previous paper, underperformed by 400 bps on average in 2013 and 2012). This underperformance mirrors the issues with investable indices, which lagged by an even wider margin in the early years.

Constraints are the Achilles heel of talented investors. Despite deep levels of talent and resources, the vast majority of traditional managers underperform lower cost indices over time. The original concept of the hedge fund industry was that with fewer constraints, talented managers could deliver exceptional returns. Not surprisingly, many of the original distressed debt investors in the early 1990s were merger arbitrage specialists – when the junk bond market coll......................

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