How much would you pay for a free (McAlpha Meal) lunch?
May 20th, 2008 | Filed under: Investment Management FeesImagine that financial markets were a McDonald’s restaurant. Now imagine that the Golden Arches was running a promotion on its $5 “McAlpha” sandwich meal deal. The sandwich, along with fries and a Coke was free while supplies last.
But there’s a catch. As stocks of this tasty free lunch dwindle, you will be able to bid up the price to get your hands on the remaining supply. Of course, you could always just pay the $5 and get the meal at regular price, but you’d rather save a few bucks. How much are you willing to pay?
You’d probably pay up to $4.99 for this free lunch. While most investors won’t agree to 99% performance fees, they face the same type of decision when buying pure alpha (assuming, for a moment that “pure alpha” exists in the form of a fund). The bottom line is that “pure alpha” is a free lunch and is therefore worth paying for.
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