Hedge funds charge hefty fees. Because they are that good (or so they claim)! They seem to provide good returns that have little in common with the overall stock market return (S&P 500), or U.S. bond market returns. But what is the source of their returns? Is it a stream of new and ever ingenious investment ideas generated by the hard work of a hedge fund manager, or could it be some “secret formula”, discovered long ago, and run by a computer, while the hedge fund manager is now busy golfing and fishing? An example of such a strategy would be just writing out-of-the-money put options on the S&P 500 index.
I, personally, have nothing against paying high fees for truly new investment ideas, generating high returns. For example, SAC’s 50% performance fee sounds like a fair deal for “sure-thing” returns generated by insider tips (oh, if only that strategy was legal)… On the other hand, I do have a problem paying a 20% performance fee as a “royalty” to a computer running a formula discovered a long time ago. However, if nobody else on the market offers returns based on the same (or similar) formula, then I am stuck with that hedge fund. And that is exactly what the situation was until recently.