Multi-manager hedge funds act as expensive index funds guaranteeing underperformance
Scott Wilson · Scott Wilson – Concentrated Investing at Washington University-St. Louis (Capital Allocators, EP. 159) · Oct 5, 2020 · at 22:32
Scott Wilson, CIO of Washington University in St. Louis, explains why holding numerous hedge fund managers destroys net institutional returns.
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“Because essentially you're an index fund on both sides of the market with an expensive active management fee structure on top of it. And the fee structure is problematic in that it guarantees you always do worse than the average, right? So you're essentially in long correlation. If you have a hedge fund that's up 10% and a hedge fund that's down 10% on a gross basis, you're flat, right? But you paid them both one and a half percent. Ish as a management fee. And then the one that was up 10%, you also paid a 15, 20% carry to. So on a gross basis, you're flat, but after you put on your fee structure, you've done horribly. And that's problematic in hedge funds in general. And I think you can look at it like industry wide returns. It struggles because the proliferation of just the number of hedge funds on a look through basis, that's kind of what the industry owns, right? They own both sides of the market. It's really tough with that fee structure to produce alpha.”
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