Over the last three many years, fee compression has transformed stock and bond markets, along with the emergence of transparent, low-cost mutual fund and ETF structures. Yet alternatives, even inside the same vehicles, have largely resisted similar pressures. As diversification becomes increasingly difficult to realize, the worth of uncorrelated returns may help explain why.
Alternatives here include investment funds and ETFs that pursue strategies comparable to global macro, managed futures, merger arbitrage and other long/short approaches.
The data illustrates this divergence. In 1992, the common alternative investment fund charged an expense ratio of 1.45% per yr. By 2024, the median has increased to 1.77%. This contrasts with the overall trend of falling fees in most other fund categories.
Why has the fee-cutting revolution that has transformed much of wealth management largely ignored alternatives? To examine this, we consider several possible explanations, including higher performance, changes in systematic risk, and greater co-movement across indices, each of which could justify higher fees.
The findings point to a more structural explanation: as global diversification has declined, it has turn out to be harder to search out uncorrelated returns, allowing alternative strategies to keep up higher fees.
Figure 1 shows the common expense ratios for fixed income and large-cap equity funds, each index and lively funds. As the info shows, fees in these categories fell while alternatives remained high, underscoring the extent to which they’ve bucked broader industry trends.
For example, in 1992, lively bond funds charged a median expense ratio of 1.10%. By 2024, this average value had fallen to 0.61%. Over the identical period, alternative fund fees rose.
