Issue #31

The hedge fund industry has an incentives problem.

Alpha is coming from smaller managers, but it is blocked. Information and the physical nature of the industry create a barrier that makes it very hard for investors to access it.

The big managers make a lot of money because they have the marketing and distribution to gather assets. And by charging 2% on billions, they become very comfortable.

A prime example is a well-known and very large hedge fund with over $100 billion in AUM that hasn't delivered much alpha in the last decade. However, it does have good marketing and a strong brand name, and when intermediaries sell products to investors, they invariably prefer to sell the brand-name product they deem “safe.”

Another problem with multi-billion dollar funds is that there is less alpha at that size. And even if there is alpha, you push it away and eliminate it as soon as you move into it.

In other words, the industry likes to push investors into big-name funds, but this doesn't necessarily create good outcomes for investors.