Hedge fund terms: Dealing with the prisoner’s dilemma

Wasn’t it easier in the old days? Perhaps the memory plays tricks – and hedge funds were always this complicated. But in the early days of the industry, it was certainly the case that most strategies were relatively simple – being macro funds or other directional strategies such as CTAs, or long/short equity funds focusing on liquid, large-cap stocks.

Those were the days: management fees were low – usually 1% a year (not 1.5% or 2%, as is commonplace today); and redemption terms generally easy – with investors able to exit monthly or, at worst, every quarter.

The great benefit of those early strategies was, of course, liquidity. Even if the manager messed up, the portfolio could usually be liquidated quickly.

But, over time, ever more managers have launched funds with longer and longer investment horizons across an ever-widening array...