A Hedge-Fund Fee Plan That Only Charges for Alpha

(Bloomberg) One of my biggest criticisms of the hedge-fund industry has been the mismatch between fund performance and management fees. A traditional fee structure of “2 and 20” (a 2 percent management fee plus 20 percent of any gains) is both expensive and, truth be told, unnecessary. Expensive, because one can capture market-average returns, or beta, for a few basis points in fees in a low-cost mutual fund or exchange-traded fund; and unnecessary because investors end up paying a 20 percent surcharge for beta rather than out-performance, or alpha.

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