Peter Kraus, the former chairman and CEO of AllianceBernstein, believes the active-management model is broken.
"The existing model, in almost all cases, rewards people whether or not they perform," Kraus said in an interview for the Delivering Alpha Newsletter. "As assets grow, you earn more money. Well, clients don't actually hire us to grow assets; they hire us to perform."
So, when he started Aperture Investors four years ago, he structured the fee structure to tilt more toward performance and away from a percentage of assets managed.
Aperture charges its investors a 30 percent performance fee – higher than the industry standard, which is around 20 percent. But then, its management fee is commensurate with that of a relevant ETF. And the performance fee is charged for returns above that benchmark.
Its largest fund, managing nearly $1 billion as of Aug. 12, focuses on credit opportunities, and has outperformed its benchmark by 93 basis points since inception in May 2019. About half of the firm's funds have delivered alpha for investors, according to performance figures obtained by CNBC.
With so much on the line to deliver return, we asked Kraus how he was putting capital to work. He said it's been a lot of bottom-up fundamental work.
"In the equity strategies, we are, what you would expect, highly research dependent, looking for specific opportunities with companies that we think have long-term growth, or undervalued and will accelerate their value over time," Kraus said. "It's fundamental research to find credits, and obviously being careful about the market because, you know, credit markets tend to be more macro-driven."
Kraus said in the one hedge fund it runs, it's pretty close to neutral in terms of positioning – not net long nor net short. And the funds, in general, do not take on much leverage.
So, it's incumbent on the managers to structure their portfolios to beat its indexes. With management fees so low, we asked whether Aperture was able to "keep the lights on" – the industry trope used to justify the usual 2 percent of assets it tends to charge.
"How many assets do you need to keep the lights on?" Kraus said. "And once you have the lights on, then do you need to keep charging a fixed fee? Because your incentive is just to continue to gather assets."
Aperture has about $3.8 billion under management – roughly the same as when it first launched back in 2018. He said clients appreciate the model for its "clarity" against the backdrop of capital moving from active to passive. He added that allocators would rather not pay a performance fee for the beta their money is exposed to.
"I'm incentivized as the owner of the business identically with the client," he said. "I don't make much money – if any money, unless we actually perform."
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