Fund fees tend to be structured in two ways. A management fee of a 1% and a performance fee (in hedge funds 20%). As the fund becomes larger and larger, the management fee becomes a more and more substantial part of the revenue stream which gradually disincents the fund manager from seeking superior performance (As an example, if you make 50K a year in salary, that next 50K in bonus is a huge incentive. If you make $50M a year in salary, you certainly won’t work as hard for the next $50M.)

The problem becomes more acute when the fund is publicly traded. Performance fees are by their nature, unstable and unable to be predicted. MAnagement fees are annuity-like, highly predictable and reliable. As a shareholder, the clear prefererence is for management fees. However, as a investor in the fund, your preference is for performance fees, as higher performance fees means that your gains have grown. Publicly traded fund management have conflicting fiduciary responsibilities and, given that the shareholders ultimately elect the board of directors who in turn dtermines their own compensation, will likely reward shareholders more than investors.

As a side note, A more elegant explanation of this conflict can be found in Swensen’s citation of Miles Morland of Blakeney Management.

http://books.google.com/books?id=SbIz2gRbrF4C&pg=PT282&lpg=PT282&dq=%22blakeney+management%22+guerrilla&source=bl&ots=qoaQLeGNRz&sig=70cgVk8meIkOpdnkJAsY9crd7Fc&hl=en&ei=dZ4BSsGGDdqgmAfZlbCYCA&sa=X&oi=book_result&ct=result&resnum=1

Yes, Mark, but I’m sure you can give us 6 billion reasons why this worked out well for you.

GO MAVS!