Institutional Investor: A Hedge Fund Adviser’s Open Letter to Pension Trustees

Included below is an excerpt of Andrew Beer’s article published on June 20, 2016:

It’s hard to pick up a financial newspaper these days without seeing some sort of piece on a purported hedge fund disaster.  There are a number of reasons, I surmise, that this is the case:

The “rich guy gets hammered” trope sells papers.  For every fund down 20 percent, a different one is up 20 percent.  There’s a cottage industry of people who run around trying to find the next calamity.

High fees − justifiably − lead to high expectations. When you pay 2-and-20, you should expect magic.  Reveal the wizard as human, and disappointment and anger inevitably follow.

Zero-interest rates make high-fee strategies look terrible.  Cash plus 4 percent with bondlike volatility and low correlation to traditional assets is a valuable diversifier.  The problem is that today cash plus 4 percent is only 4 percent.  That seems pretty paltry after you’ve paid 3 percent or more in fees.

Bull market equity returns are a terrible point of comparison.  The next 30 percent-plus drawdown in equities will be a great equalizer across strategies.  Procrastination has paid off handsomely.

Many articles miss the point.

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June 21, 2016