We once asked where the beef was, and if she were alive, Clara Peller would be able to tell us. As an industry we think we understand where the beta is, but do we really? As the chart below indicates (thank you, Preqin), hedge funds once again proved that most of their exposure is still nothing but beta. Where was the alpha or hedge? Yet, we as an industry continue to pay ridiculous levels of fees to gain exposure to them. Why?
Comparisons don’t look any better as we extend the time frame to 10-years or even 20-years, despite the inclusion of 3 sharp market sell-offs. It might make sense for endowments and foundations or HNW individuals to use hedge funds given that they have an absolute orientation because of their annual spending policy, but it really makes no sense for pension systems given that their mandate is a relative one – plan liabilities. Cheap beta (S&P 500) is much cheaper today than at year-end, and the cost to access it is a basis point – not some formula that includes high base fees and a percentage of gains.