The hedge fund model has been under attack for decades. At least since the financial crisis But assets under management remain unprecedented. Christopher Ailman oversees the nation’s second largest public pension fund, CalSTRS, with $300 billion under management. He’s in a conversation with Leslie Picker over the lofty alpha price.
The content below has been edited for length and clarity by Ritika Shah, producer at CNBC
Leslie Picker: Chris, I want to ask you, in your assessment Does the manager at work send alpha?
Christopher Isleman: I’ve been hiring passionate managers since the mid-1980s and in very different funds. Now all plans are government plans. So that might be a caveat that I have to add. Our active managers in the US stock market have added value and they created an alpha but not after the fee And that̵7;s the critical point. I think Alpha is expensive, hard to find, but overpriced. So even in a year, three years, five years, or even a 10-year period, we rarely see managers consistently increasing their net worth in fees.
Options: So, if the hedge fund has to reduce its fees How low do they have to be to tempt you to put more money into that area?
Isleman: I’ve been saying for a long time that I thought the Model 2 vs. 20 in private real estate and hedge funds was broken. and for a fund like us that has that size We won’t pay classic 2 vs 20 like that. That’s part of the key. And I’m a big fan of profit sharing. I think the incentives for managers and profit sharing make sense. The problem is, it’s always one way. They share without any disadvantage. And we haven’t figured out how to make a good plan for that.
Options: Why isn’t the industry so responsive in seasons 2 and 20? Why do you seem to have a more opposite view on that page? I’m sure people don’t like paying 2 and 20, but they still do.
Isleman: I have to say number one, good marketing, but also a good place to invest. People love the idea of being in a hedge fund because it sounds mysterious and wonderful. Hedge funds did very well in the late 90s because they diversified from TMT. They did well in 2007, but the most profitable funds are the smallest funds that can increase their value. When you’re big investors like us, we’re going to throw in their AUM and make them invest in more strategies than they actually need. So I think assets will continue to grow for this area, one because it’s an attractive place to invest. It does not mean that it will produce lasting results in the long run.
Options: I’d like to change a bit and talk to you about what the hedge fund industry has been doing this year. I mean, they were Wall Street disruptors three decades ago, and now they’re preventing disruptors. New from retailers that don’t charge 2 and 20, they can risk as much as they want. Because they only worry about their own funds. They don’t have to worry about losing CalSTRS funds or family office funds. Do you think this will cause a change in the hedge fund industry? We will look back and say that this is where the sea change occurred.
Isleman: The answer is yes, Leslie. I think for a really short time the hedge fund industry was seen as cool. And those people are great. They are tarnished and despised. I’m not surprised to see all young people wanting to get an ounce of meat out of the hedge fund industry. People in their 20s and under don’t like the establishment. I’m in the baby boom era. We don’t like establishments. We are now an enterprise So I don’t think it can get rid of hedge funds, but I think, you know, this is a really interesting change. that we see You say their transaction cost is zero. They can trade stocks at no cost. They can do it on their phone anywhere. So the efficiency and effectiveness of what they do is very fast. Now they are speculating and trading fast. So they don’t invest, but some apps are built to force this generation to save. I think it’s huge. In the older generation, people didn’t start looking at investing until they were 40 or 50. You had the first generation saving money and yes, they were speculating. They are investing in cryptocurrencies Speculation on its own is bad and they have to learn a hard lesson. But they’re starting to save money and that’s a huge deal. and get compound interest They will get a little better with each generation.
Options: There are some who say speculative activity is disruptive. and affect the overall market sentiment. Do you think this type of behavior needs to be controlled?
Isleman: I will say no. The market will correct itself. We saw that in the 1990s there were media, telecommunications and technology stocks. You could go back to the Dutch tulip mania in the 1500s. You see a period of rampant speculation. exorbitant price ridiculous price The market was right and it came back. People learn difficult lessons. Some rules may be required regarding these communication networks. and what is clearly a group of people The herd idea seems to continue when you have daily trading that is five times more than the stock float. Short squeezes were on the market throughout the 1930s and 20s, so they were part of the market. This is not normal harassing I would say mature people like me who like stable markets. but not bad Keeping young people engaged and active and learn to accept risks