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.
One possible explanation is that alternative funds deliver superior performance and can therefore command higher fees. When we examine the monthly returns of alternative funds, however, the data offer little support for this view. Average returns have declined slightly over time, though not to a statistically significant degree. A similar pattern appears in risk-adjusted returns, which have remained broadly stable, suggesting that higher fees are not supported by improving performance.
Another possible explanation is that changes in the risk profile of alternatives justify higher fees. To examine this, we track measures of systematic risk over time. The data show little change in betas or volatility across periods, suggesting that shifts in risk do not explain the persistence of higher fees or justify a higher pricing premium.
Finally, we consider the changing nature of diversification around the world. In prior research (“Portfolio Diversification: Harder Than It Used to Be?”), we show that correlations among stock indices have increased considerably over time, making diversification harder to achieve. As assets move more closely together, the benefits of traditional diversification become more limited.
Correlation Among World Indices
This provides a potential explanation for the persistence of higher fees in alternatives. As uncorrelated returns become more difficult to find, investors may be willing to pay a premium for strategies that offer diversification. While we do not have direct proof of this relationship, it remains the most consistent explanation for why fees have stayed elevated in the alternatives space.
Alternative fund fees remain high despite decades of compression across equity and fixed income vehicles. Uncorrelated returns are harder to find, which may help explain why.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
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