Be a Better Alpha Analyst: Forget About Fees!

There's a widespread misunderstanding regarding the importance of fees in alpha and beta strategies. Low fees in beta-driven investments are critical. Several index funds and ETFs can capture the same underlying return source, such as the S&P 500, and fees account for the vast majority of the performance difference between investment options.

Analyzing the subset of hedge funds using alpha strategies requires a unique set of tools. While beta-driven funds capture the performance of a market, spread, or asset class, alpha returns are skill based. An example of an alpha strategy is market-neutral equity. These portfolios hold stocks long and short, and the portfolio can be dollar neutral, beta neutral, or both. This means you don't care if the broader market goes up or down — returns come from the relative performance difference between the long and short portfolio.

In this arena money spent on top analysts can generate alpha — making higher fee funds potentially more attractive. In your analyses, make sure you are comparing net performance, so fees are already baked into the returns.

The best-performing hedge funds have one thing in common: above-average fees. The legendary Renaissance Medallion Fund in charges (approximately) a 4% management fee and a 40% incentive fee, twice the industry average of "2 and 20." For these "high fees" investors have been rewarded with (approximately) 70% annualized returns over the last 20 years. Don't bother trying to invest, the fund is closed to external investors and manages money (rumored to be $3-4 billion) exclusively employee money.

?Be a better investor by using the right tools for the job. When buying beta, low fees are paramount and when investing in alpha strategies, don't focus on fees and always analyze net performance.