Focus on alpha, not fees: Zenith
Management expense ratios (MERs) are a “crude instrument” for measuring costs and should not be used in isolation, according to Zenith Investment Partners head of alternatives Daniel Liptak.
Liptak made the observation as the group released its first hedge fund sector review, focusing on the market neutral space. Liptak said there was a “compelling argument” to suggest that hedge fund managers were charging less for alpha than benchmark-aware funds on the active portion of the portfolio, stressing that any discussion about fees should be undertaken with reference to alpha, not just the headline fee rate.
Liptak said although hedge fund managers do generally charge higher fees than benchmark-aware funds, the after-fee alpha generated for the investor is significantly higher.
He pointed to figures showing the investor got back 13c for every dollar paid in fees to an average long-only manager over the last five years. Market neutral, however, returned $2.21 for every dollar paid in fees over the same period of time.
“In another words, you got another $1.21 over the top of the fees that you paid. It costs you 87c to have a long-only manager and you tore it up,” Liptak said.
Liptak also warned that the MER calculation was a “very crude instrument in measuring costs”.
“It does not provide investors with a true after-fee alpha expectation. Therefore, it’s very simplistic, and probably one that could be used as a tool, but not one that should be used in isolation,” he said.
Market neutral funds are aggressive types of mutual funds that aim to deliver superior returns by balancing bullish stock picks with bearish ones.
Following the review, Zenith’s highly recommended funds within the market neutral space were Bennelong Long Short Equity Fund and Regal Tasman Market Neutral Fund, while BlackRock Australian Equity Market Neutral Fund and Aurora Sandringham Global Income Trust were listed as recommended, among others.
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