The head of CalSTRS, the second-largest public pension fund, said in a recent interview with CNBC that active managers rarely add value after fees.
Here is a summary of comments from Christopher Ailman, who oversees CalSTRS ($300 billion AUM):
- “I think alpha is expensive, it’s hard to find, but they price it too high. And so, the net even over a year, three years, five years, even a 10-year time period, we seldom saw managers consistently add value net of fees.”
- Ailman is a fan of profit-sharing by active managers, but notes, “The problem is, it’s always one way. They share on the upside, but don’t get hit on the downside. And we haven’t figured out a way to create a good plan for that.” He references the 2-and-20 model (2% management fee charged and 20% of profits paid out) saying that it’s “broken.” Still, investors still agree to it because they “love the idea of being in a hedge fund because it sounds mysterious and awesome.”
- On the recent surge in retail trading, Ailman said, “I’m not surprised to see all the young people want to take an ounce of flesh out of the hedge fund industry,” but adds, “I don’t think it’s going to get rid of hedge funds.”
- Ailman notes that the rise in retail trading apps is an interesting development: “In prior generations, people didn’t begin to look to invest until their 40s of 50s. You’ve got an entire generation that is now saving for the first time. And yeah, they’re speculating, they’re investing in cryptocurrencies. Speculation by itself is not good and they’re going to learn some hard lessons, but they’re starting to save and that’s enormous. Now, if they can figure out how to do it for the long term and get compounding of interest, they’re going to really be a bit better off as a generation.”
- According to Ailman, regulation of speculative trading is not necessary because “the market’s going to self-correct,” he said, adding, “You see periods of rampant speculation, exorbitant prices, ridiculous prices, the markets correct and it comes back, people learn a hard lesson.” Still, Ailman noted that some regulation may be in order for “communication networks and this sort of, what was clearly a crowd, herd mentality that seem to go on when you have daily trading that are five times the amount of the float of the stock.”
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