Re: True alpha is reflected in a hedge fund's fees

Isn't it natural that in a competitive market such as the hedge fund industry, you would see fees equal expected profits? In this case, you can view alpha as the profit for which an investor pays.


I think that there are two possible ways to explain the divergence in fees from the early days of investment world to now:

(1) Investment managers simply did not earn consistent alpha in the early days of the investment world, in which case fees would be low and nearly equal across the board.

(2) Many managers, especially in their early years of the hedge fund industry, did not have a long track record of returns. As such, investors were unable to create expectations for future alpha. In order to attract investor money, they would have used the same fee structure as that of other managers. Over time, when track records were established, investors were able to form expectations and managers were able to differentiate their fees.

Lastly, I do have a question regarding the following statement: "differentiation between the good [managers] and the bad [managers] is becoming greater." Does anyone know whether this is true, and if so, why is this be the case?

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