Hedge Fund Math: Heads We Win, Tails You Lose
Why aren&#x27;t hedge funds compensated based on some sort of alpha, the difference from a benchmark?   One of the common memes of investing over the last few decades is that no one can reliably beat the market.  It&#x27;s very easy to use an index fund to track the market at very low cost.  If I invest in an actively managed fund I want them to be compensated for doing better than I could have done myself.<p>There are a few advantages to this, in my eyes:<p>1. They only get compensated for their value, not the rising of the economy.  It&#x27;s terrible for the investor to have an economy that&#x27;s going bonkers and the hedge fund that&#x27;s taking 20% of that while not providing their own value.  You could easily be doing worse after fees.
2. It incentivises managers to figure out ways to avoid losses.  If the market drops 10% in a year, but the fund only drops 5%, treat it similarly to a profit of 5% because that&#x27;s the value the hedge fund provided.<p>Looking at any investment gains in isolation is outdated.  Investing is easier than ever for the layperson.  We need to start looking at the opportunity costs.