Over the past three decades, fee compression has reshaped equities and fixed income, alongside the rise of transparent, low-cost mutual fund and ETF structures. Yet alternatives, even within those same vehicles, have largely resisted similar pressure. As diversification becomes harder to achieve, the value of uncorrelated returns may help explain why.
Alternatives here refer to mutual funds and ETFs pursuing strategies such as global macro, managed futures, merger arbitrage, and other long/short approaches.
The data illustrate this divergence. In 1992, the median alternative mutual fund charged 1.45% per annum as an expense ratio. By 2024, the median had risen to 1.77%. This stands in contrast to the broader trend of declining fees across most other fund categories.
Why has the fee reduction revolution that reshaped much of asset management largely bypassed alternatives? To explore this, we consider several possible explanations, including superior performance, changes in systematic risk, and increased co-movement among indices, each of which could justify higher fees.
The evidence suggests a more structural explanation: as global diversification has declined, uncorrelated returns have become harder to find, allowing alternative strategies to sustain higher fees.
Figure 1 shows median expense ratios for fixed income and large-cap equity funds, both index and active. As the data illustrate, fees have declined across these categories, while alternatives have remained elevated, reinforcing the extent to which they have resisted broader industry trends.
For example, active fixed income funds charged a median expense ratio of 1.10% in 1992. By 2024, that median had declined to 0.61%. Over the same period, alternative fund fees increased.
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