Alternative Investments Must ‘Evolve or Die’

Jon Foster is president and chief executive of Angeles Wealth Management, a national wealth-management firm serving generationally wealthy families. 

Jeff Benjamin: Why are you down on hedge funds? 

Jon Foster: Hedge funds are supposed to provide reliable low volatility investment returns; better than the risk-free rate without the volatility of equities. 

Hedge fund managers have also told us for decades not to be concerned with the high fees, only with the quality output. After two decades of inconsistent delivery, or should I say consistent under-delivery, hedge funds are simply not working as an asset class. 

JB: Why are they not working? 

JF: Fees matter. Taxes matter. Transparency matters. True risk matters. 

A 2% management fee plus 20% of the profits without concern for tax liability or true visibility as to the strategy employed is a recipe for failure. Time and time again, we have seen successful hedge funds operating secret proprietary strategies that then dramatically underperform, or on occasion, completely blow up in a cloud of mismanagement of risk, or even fraud. Transparency is a great sanitizer. 

JB: What’s the alternative to alternatives? 

JF: To me, hedge funds are simply a subset of alternatives. To us, alternatives are strategies that deploy nonpublic market correlating investment strategies, such as private equity, venture capital and private credit. 

For example, I believe private equity is an extremely attractive alternative investment class, because the basic premise works. If someone asks me to lock up my money for seven, 10 or 12 years, I expect to underwrite that investment to perhaps three times the risk-free rate, and the sellers basically agree with me. The rest is simply negotiation. 

JB: Do you think the hedge fund space will evolve from here? 

JF: I think for the hedge fund industry, it is time to evolve or die. Some of the smartest people I know work in this space. Now they need to cut fees, think about taxes, provide transparency, and yes, actually deliver reliable low-volatility returns in excess of the risk-free rate. 

JB: Can investors get sufficient alternative exposure in mutual funds and ETFs? 

JF: There has been much talk about the democratization of alternatives. At present, I think this is marketing in search of reality. 

If scarcity is truly a key component of opportunity, how can wide access equal great results? I am concerned that the term ‘public alts’ is an oxymoron, much like ‘walking dead’ or ‘seriously funny.’ 

Let’s hope that public alts are not another in a long line of Wall Street creations to distribute sub-standard products to the under-informed retail buyer. 

Contact Jeff Benjamin at [email protected] and find him on X at @BenjiWriter