Re:New York Discovers Wall Street Charges Fees
by btilly on Friday April 10, 2015 @01:57AM
(#9352771)
And the simple model is wrong. Here is why.
If you are a customer for hedge funds, you should be willing to pay anything up to the expected future alpha based on past correlations between previous and future alpha.
That correlation is always affected by regression to the mean. Therefore someone with a good track record will not be able to charge on the expectation of future performance matching past performance. But only on the expectation of future performance being somewhat better than the market mean.
The ideal if everyone does everything perfectly is that, on average, fund managers that can generate excess alpha will, again on average, capture their entire outperformance as fees.
If you are a customer for hedge funds, you should be willing to pay anything up to the expected future alpha based on past correlations between previous and future alpha.
That correlation is always affected by regression to the mean. Therefore someone with a good track record will not be able to charge on the expectation of future performance matching past performance. But only on the expectation of future performance being somewhat better than the market mean.
The ideal if everyone does everything perfectly is that, on average, fund managers that can generate excess alpha will, again on average, capture their entire outperformance as fees.