[Tycho]

One reason the article didn't mention is that investors want their portfolio managers to be highly incentivised. If a hedge fund manager is paid 2% of the AUM after growth and 20% of the profits each year, then they have a golden opportunity.

Incentives for traditional mutual fund management are not as exciting and to the investor, the actual performance is almost an afterthought compared to the initial asset allocation decision.

[makomk]

The trouble is, assuming that returns are essentially random and that hedge fund managers cannot beat the market except through luck - which seems to be more or less true - it doesn't matter how much you incentivise them. Giving them a bigger cut of the profits just means you come out worse on average. Now, it's certainly in the interest of hedge fund managers to convince investors that giving the managers a bigger cut is in the investors' interest, but that doesn't make it true.

[Tycho]

But if you truly believed that returns are random then you definitely wouldn't be investing in a hedge fund anyway, so I'd say that's a moot point.