All Else Equal: Making Better Decisions Ep72 Alternatives vs. Mutual Funds: Where Should You Put Your Money
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Feb 4, 2026 A lively discussion comparing public mutual funds to private alternatives and why their fee structures differ. They explore why alternatives often show positive alpha and why managers cap fund size. The conversation highlights performance fees like two-and-twenty and the role of liquidity and costly due diligence in shaping incentives.
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How Mutual Funds Reach Zero Net Alpha
- Mutual funds use a fixed percentage fee and display a strong flow-performance relationship where money chases past outperformance.
- Competition drives net alpha to zero while gross alpha times fund size measures manager skill.
Why Two-and-Twenty Fits Alternatives
- Alternatives commonly use a two-and-twenty option-style contract to reward upside without punishing downside.
- That contract serves both to extract rents and align incentives where illiquidity requires informed participation.
Illiquidity Changes The Game
- Alternatives differ because their underlying assets are illiquid and investor capital is effectively locked up.
- Illiquidity forces investors to do costly due diligence before committing capital.
