What seems to have a poor understanding in the practitioner world is that a promote fee does not align the interests of GPs and LPs. A promote looks like a call option where the GP gets all of the upside and none of the downside but the LP gets all of the downside. For anyone who doubts this, try drawing out the payoff diagram.

I don't lose sleep over not including an incentive fee for two reasons. The first is that if one creates an incentive fee based upon alpha, then a GP could create positive alpha yet have negative nominal returns. This does not sit well with pensioners but is financially the right way to do it. The second is that the incentive for the GP to perform well is to have more capital allocated to them in the future. In short, investment management is not a one time game.

The difference in equity risk can be bifurcated into two sources. The difference in risk due to the difference in asset level risk and the difference in financial leverage. Having GPs report asset level returns would remove fully half of this source of the difference in equity risk and this is an easy way to make a risk adjustment. Measuring the difference in asset level risk is hard. But reporting at the asset level and comparing performance at the asset level would be a gigantic step in the right direction.

What we found was that the largest difference in alphas was due to the difference in fees. So fees matter... a lot. Anything investors can do to control fees is a good thing. That being said, investors need to hire competent managers and they need to be paid. But extremely competent firms such as JPM have lowered the lowest tier fee they charge on their core and core plus funds to a fixed fee in the 50 bp range. If you can get JPM for 50 bp I am not sure why you would agree to pay anything much more than that if you are a large institution and are working at scale where you can get these fee breaks.