Hedge Fund Reader : Hedge Funds: Miller states that active money management is worth its extra cost

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August 03, 2005

Hedge Funds: Miller states that active money management is worth its extra cost

For long investors have felt that hedge fund managers charge an exorbitant amount to manage the funds. They feel it is definitely high when compared to what is charged by mutual funds managers. Well this thinking has been challenged by Ross Miller, professor of finance at the State University of New York at Albany. According to him what you pay to the latter, thinking it is a low fee is in actual sense high. He argues that the 1-2% fund management fee along with the 20% of total profits made by the hedge funds are still less when you see them in the context of ‘alpha’ and ‘beta’. ‘Beta’ is a gain which is almost effortless – it is the pay-off generated by all-stocks-all-the-time managed fund. ‘Alpha’is a result of skill of the fund manager, his ability to select the right stock at the right price. What the Hedge Funds charge the investor is for ‘alpha’ alone where as in the other case the investor is charged for both ‘alpha’ and ‘beta’. Theage.com.au reports:

“The standard image of hedge funds, or private partnerships designed for the wealthiest investors, casts them as high-cost propositions, with the typical manager charging 1-2 per cent of assets per year plus a 20 per cent slice of the profits.”

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August 3, 2005 in Research | Permalink