During the last 10 years the hedge fund industry has outperformed the market with less volatility, Simon Fludgate, partner at Aksia, a hedge fund research and advisory firm, told CNBC Tuesday.
The key is for investors to be diligent and make sure there's an "alignment of interest between the investor and the hedge fund manager," Fludgate said.
"We like to look at the underlying assets to the hedge fund and say does it make sense based on the compensation of the payment of the performance fee," he said. "It's really about the performance fee. The management fee is paid kind of quarterly, the performance fee that's what's paid either monthly, quarterly, annually."
In addition, Fludgate went on to say one of the big problems in 2008 was many hedge funds were in illiquid assets while "racking up performance fees."
"The best structure is where you get into a performance fee where you can actually claw back, it's held in escrow, and you can claw it back should the next year you go down," he said.
"The problem with that, and this was kind of ironic, is in 2008 they changed the deferred compensation rules and it made clawbacks extremely difficult to do for the managers. So as investors were clamoring for clawbacks, the managers were saying I'd like to, but I can't," Fludgate explained.
The hedge fund industry topped the $2 trillion asset mark recently, which reflects investors' need for an attractive return, he added. "People look at the long-term aspect of hedge funds. Most investors are looking at hedge funds and are saying, 'OK, you know, I need a high return on my assets. Where can I get it?," and they look at hedge funds as the place to get that."
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