I contacted several money managers who employ a variation of this type of fee. Joel Greenblatt of Gotham Funds, and a recent Masters in Business guest, offers institutional investors the choice of paying 30 percent on outperformance or a flat 1 percent management fee in one of its hedge funds. The math suggests most investors would be better off with the flat 1 percent fee.
As noted above, some hedge funds have been forced to accept “1.5 and 15” — that is a 1.5 percent management fee plus 15 percent of and gains, even if they lag behind the market. Although this is less than the traditional fee structure, it still suffers from the same problem of paying a performance fee for beta or worse. As I’ve said before of hedge funds, Come for the high fees, stay for the underperformance. Fulcrum fees are turning the hedge-fund model on its head. In an era of low-cost indexing, the rest of the active-management world should take notice.
This column was provided by Bloomberg News.