As is true for all active management, paying a fee does not guarantee a payoff. Investors, therefore, need to be diligent in their manager selection process. The fee structure associated with most hedge funds gives investors an incentive to seek out good quality managers when they ask for high intensity active management. Because hedge fund managers earn bonus fees after hurdles and high water marks are exceeded, they have an incentive to do well-although, of course, not all succeed.
Ultimately, therefore, when it comes to intensity of active management, investors in hedge funds may ultimately just be getting what they pay for.
(In general, alternative investments involve a high degree of risk, including potential loss of principal, can be highly illiquid, and can charge higher fees than other investments. Hedge strategies and private equity investments are not subject to the same regulatory requirements as registered investment products. Hedge strategies often engage in leveraging and other speculative investment practices that may increase the risk of investment loss.)
Leola Ross is a senior research analyst for Russell Investment Group.