A Census of 198 Funds Shows What Fees Actually Cost

10 hours ago

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What's New

The appendix of OCERS' annual fee report, filed with its latest Investment Committee packet, contains something rare: 198 alternative investment funds, each disclosing both its gross and its net return since inception, in the same table and on the same date. California law requires it. The result is a census of what fees cost, measured fund by fund rather than assumed from a term sheet. The median fund gives up 3.6 percentage points of annual return between gross and net. The mean gives up 4.88. Twenty-three funds give up more than ten points, and eight turn a positive gross return into zero or a loss.

Why It Matters

The industry convention is that a 2-and-20 structure costs an investor roughly four points of internal rate of return. That number is a modeling output rather than an observation, and it hides everything interesting. What the OCERS data shows is not a central tendency but a long right tail: the typical fund sits close to convention and a meaningful minority sits nowhere near it. For an allocator that reframes the diligence question. The issue is not whether fees average four points, it is how to avoid the funds where they cost fifteen.

Big Picture Drivers

The middle of the distribution is unremarkable: Roughly half the funds sit between two and five points of drag, so the convention holds for the median case.
The tail is where the money goes: Seventy-one funds, more than a third of the sample, give up five points or more, and 23 give up over ten.
Fee drag can exceed the entire return: H.I.G. Middle Market LBO Fund IV reports 17.6% gross against negative 9.6% net, Asana Partners Fund III reports 3.9% gross against 0.0% net, and six other funds show the same sign reversal.
Vintage contaminates the extremes: Investindustrial Growth III shows 65.5% gross against 17.3% net, a 48-point gap that reflects a young fund where fees have been charged and value has barely compounded rather than a heavy fee load.
The gross numbers are self-reported: OCERS compiles the report from invoiced fees, manager-supplied information and consultant data, and nobody audits the gross return a manager submits.
Four funds report net returns above gross: HealthQuest Partners III shows 1.2% gross against 5.0% net, which sets the precision to assume in the rest of the column.

By The Numbers

198 funds disclosing matched gross and net returns
3.6 points median gap between the two
4.88 points mean gap
23 funds giving up more than ten points
8 funds with a positive gross return and a zero or negative net return
108 funds in the report disclosing no usable pair at all

Key Trends to Watch

The dataset improves with every filing cycle: Each year of California disclosure adds a cohort, and within three or four annual reports there will be enough matched pairs per vintage to strip out the J-curve and build a vintage-adjusted fee-drag curve from public filings alone.
Sign reversals are the diligence signal: A fund reporting healthy gross returns and a negative net return is not an expensive fund, it is a fund whose gross number measures something the investor does not own.
Standardization pressure will come from the data rather than the statute: Once enough plans publish matched pairs, inconsistent gross-return methodology becomes visible as noise, and the pressure to define the term comes from users comparing filings.

The Wrap

The useful finding here is a shape rather than a number. Fee drag is not a constant that can be assumed at four points and forgotten, it is a distribution with a fat right tail, and the tail is populated by identifiable funds rather than by bad luck. That distinction is what makes it actionable, because an allocator cannot negotiate its way to a lower average but it can decline the funds that show up at fifteen points. The caution is that the data is self-reported, unaudited and mixed across vintages, so anyone treating the extremes as evidence will be wrong. Read the middle and the middle is boring. Read the tail with vintage in hand and the next annual report becomes worth waiting for.