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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 paper here.

A recent note (Part 1) discussed a potential solution to excessive hedge fund fees, the Investor Aggregation Model, but highlighted near term obstacles, including industry structure and agency issues. This note discusses a more realistic alternative: a Core-Satellite Model that builds on the experience of the traditional asset management industry and recent developments in delivering hedge fund returns at low cost and with liquidity.

Twenty years ago, an institutional investor might have allocated to a dozen different mutual funds in order to get exposure to US equities. Each fund would charge relatively high fees and the underlying portfolios would likely have substantial overlap. Today, the same investor is much more likely to get core equity exposure through a low cost index fund, and to use more expensive active managers who have expertise in specific segments of the market. The low cost, index "core" helps to meaningfully reduce overall fees, and the value-added "satellites" can improve returns over time.

A similar transition will occur in the hedge fund space over the coming years. The historic obstacle has been a de......................

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