We frequently find ourselves engaged in conversation about fee structure in managed futures. Traditionally, managers will charge a 2% management fee, and a 20% incentive fee for returns over their prior high water mark with the investor. For investors who are used to seeing fees that look a little like 1.75% total for a year from an ETF or mutual fund, this seems obscene.
Our response is uniform – you get what you pay for. For many of our investors, managed futures performance (especially since it’s calculated including those “exorbitant” fees) is worth the fee structure. When managed futures investments do their job – as they did during the ’08 crisis – the outperformance is more valuable than the fees being paid back to the manager.
Once this conversation takes place with a world-weary investor, the fees usually become a non-issue in the decision making process, but that has never slowed down admonishments about the fee structure from the traditional investing space. For many advisers, in particular, there can be a fixation on how much an investment “costs,” without contextualization of the investment’s performance and role in a portfolio.
So when we see someone in the traditional space bemoaning this mindset, we breathe a sigh of relief, knowing that there are people out there who get it. Most recently, author of the financial planning industry blog Nerd’s Eye View Michael Kitces hit the nail on the head:
[…] if 2,700 basis points of outperformance is weak performance because it wasn’t an absolute positive return, but 10 basis points of expense ratio is so important to save, then maybe we need to look more carefully at outperformance and consider what we are comparing it to.
Of course, this is not to say that concerns about managing cost don’t matter. They absolutely do. It’s just astonishing the lengths that planners will go through to save a few basis points of cost, yet how little we value 100 basis points of outperformance, much less 1,000 or 2,700 basis points of excess return. It appears to me to be quite a double-standard!
Exactly. Cost and outperformance cannot be looked at in a vacuum – you have to juxtapose these factors with things like the investing climate, past performance, methodology, and portfolio needs. Otherwise, you miss the forest for the trees… or opportunity for a penny saved today. Just remember as you peruse the programs listed in our database – those listed returns INCLUDE all fees.
