Why I don’t mind paying 2/20 fees for the hedge funds we use

We’re not optimizing for low fees.

We’re optimizing for the highest risk-adjusted, after-tax returns.

An index fund is wonderful on both those fronts because you have exceptionally low fees and as long as you don’t sell, tax drag can be small.

If a hedge fund can provide a similar expected net return as stocks, lets say 10%, but it is not correlated with stocks, then the combo of the two is higher expected risk-adjusted return profile because both are 10%, but you lowered the overall volatility or risk of your portfolio.

But what about taxes?

If it’s a tax agnostic hedge fund (vast majority are) then the folks I work with in high tax brackets might only see 6 – 7% net returns. Not as interesting.

But what if the hedge fund was managed tax-aware and I was able to keep the full 10% return or maybe even get a little tax alpha on top of it?

Now we’re cooking 👨🍳

We can simultaneously increase our expected after-tax return, while reducing overall risk.

Stocks, bonds, real estate, infrastructure, hedge funds, private equity, etc. all combined together with a focus on tax-efficiency is where the optimal portfolio lies.