# Ep72 Alternatives vs. Mutual Funds: Where Should You Put Your Money Source: https://www.youtube.com/watch?v=thuxyo5AL4w Recap page: https://rapidrecap.app/video/thuxyo5AL4w Generated: 2026-02-07T01:32:38.117+00:00 --- ## Quick Overview The research conducted by Jonathan Berk and Jules van Binsbergen demonstrates that, contrary to popular belief, mutual fund managers generally do not outperform the market benchmark after fees, while alternatives managers consistently deliver positive net alpha, suggesting that investors should favor alternatives over mutual funds for superior net returns, despite the higher upfront costs associated with alternatives. **Key Points:** - Mutual fund managers generally fail to outperform their benchmark after accounting for fees, indicating a lack of consistent skill in that space. - Alternatives managers consistently generate positive net alpha, meaning they outperform their benchmarks even after accounting for their typically higher fees. - The key difference lies in incentive structures: mutual fund managers are usually paid a fixed percentage fee regardless of performance, whereas alternatives managers often have performance-based compensation, such as a 20% cut of the upside but none of the downside. - The paper shows that when mutual fund managers perform well, investors receive that excess return, but when they underperform, investors still pay the fee, whereas alternatives managers are only compensated for positive alpha. - The data suggests that investors should investigate the skill of managers in alternatives, as the industry structure rewards genuine talent more effectively than the mutual fund industry. - The study used real data required by the SEC for certain alternatives (like private equity and hedge funds) to compare performance against mutual funds over a 10-year period. ![Screenshot at 00:00: Title slide for the podcast episode 'Alternatives vs. Mutual Funds: Where Should You Put Your Money' featuring Jonathan Berk and Jules van Binsbergen.](https://ss.rapidrecap.app/screens/thuxyo5AL4w/00-00-00.jpg) **Context:** Jonathan Berk and Jules van Binsbergen, associated with the Lauder Institute at the University of Pennsylvania's Wharton School of Business, discuss their research comparing the performance and incentive structures of alternatives managers (like hedge funds and private equity) against traditional mutual fund managers. Their work challenges the long-held belief that mutual fund managers consistently outperform the market, focusing instead on empirical evidence regarding net alpha generation and fee structures in both investment spaces. ## Detailed Analysis Jonathan Berk and Jules van Binsbergen present their empirical findings contrasting the performance of alternatives managers versus mutual fund managers, concluding that alternatives managers consistently generate positive net alpha, while mutual fund managers rarely beat their benchmark after fees. The core reason for this disparity lies in the incentive contracts. Mutual fund managers typically charge a fixed percentage fee (e.g., 1% of assets under management) regardless of performance, meaning investors pay the fee even when returns are poor or match the benchmark. In contrast, alternatives managers often work under a '2 and 20' style contract (though they use a 2/20 split of the *alpha*), meaning they only get paid a performance fee (a cut of the upside) when they outperform the benchmark, and crucially, are not penalized (or don't take a cut of the downside) when they underperform. The speakers argue that this structure better aligns incentives for skill realization in the alternatives space. While mutual fund managers might *theoretically* be able to generate alpha, the fee structure means investors often don't see it, and the lack of downside penalty means managers aren't incentivized to avoid losses. The research suggests that investors should investigate manager skill in alternatives because the industry structure rewards genuine outperformance more effectively. The data used for the study came from SEC filings required for certain less liquid private investments. ### Mutual Fund Incentives - Fixed percentage fee regardless of performance - Investors pay fees even if performance matches the benchmark - Fee structure does not penalize managers for losses or underperformance ### Alternatives Manager Incentives - Performance-based fee structure (incentive fee on upside only) - Directly ties manager compensation to alpha generation - Rewards managers who outperform after costs ### Empirical Findings - Alternatives managers show consistent positive net alpha - Mutual fund managers generally show zero or negative net alpha after fees - This difference is not due to investors being 'dumb' but due to incentive misalignment ### Contract Structure - Alternatives often use an 'option contract' structure where managers only get paid on the upside (e.g., 20% of alpha) - Mutual funds often use a flat fee structure that fails to capture manager skill ### Conclusion - The structural differences in compensation lead to better alignment of incentives in alternatives, explaining why alternatives managers appear to exhibit more verifiable skill than mutual fund managers. ![Screenshot at 00:06: Jules van Binsbergen and Jonathan Berk introducing the topic of comparing alternatives versus mutual funds.](https://ss.rapidrecap.app/screens/thuxyo5AL4w/00-00-06.jpg) ![Screenshot at 00:44: Jonathan Berk posing the central question about why investors might be confused regarding the flow of funds between alternatives and mutual funds.](https://ss.rapidrecap.app/screens/thuxyo5AL4w/00-00-44.jpg) ![Screenshot at 01:17: Jules van Binsbergen explaining that alternatives management is usually privately intermediated, unlike the public nature of mutual funds.](https://ss.rapidrecap.app/screens/thuxyo5AL4w/00-01-17.jpg) ![Screenshot at 02:22: Jonathan Berk discussing the concept of a 'flow performance relationship' where investors chase past performance.](https://ss.rapidrecap.app/screens/thuxyo5AL4w/00-02-22.jpg) ![Screenshot at 03:37: Jonathan Berk pointing out that the key difference is the incentive structure which leads to managers being rewarded for positive alpha.](https://ss.rapidrecap.app/screens/thuxyo5AL4w/00-03-37.jpg)