Which alternative investments can work as inflation rises?

There are a range of approaches when it comes to performance fees, with none charged at all in some cases. For a manager to keep no more than one-third of the return they deliver above the gains of the market as a whole being a good yardstick in the current climate. 

As an example, this would mean few alternative beta products merit having a performance fee. 

Thanks to low interest rates and high historic performance attracting investors on the hunt for return, private market managers have seen less pressure to reduce fees. This is most apparent in private equity, one of the largest alternatives markets, making value for money harder to find. 

Allocating to co-investments (which requires sophisticated governance and an effort to avoid adverse selection issues), backing fledgling managers, or creating bespoke partnerships with a few favoured businesses are some of the ways investors can reduce costs. Despite some eye-wateringly expensive fees, those investment trusts that are the listed versions of private equity funds are also benefitting from this flood of capital. 

There has been record issuance this year. Often management and performance fees are charged at the trust-level, with another layer of management and performance fees in most of the underlying limited partnerships and secondary deals. That is before one even attempts to calculate fund operating expenses. The associated performance drag seems to be overcome only by adding still more leverage. Caveat emptor.