Tremont believes two factors, trading advantages and incentive based compensation, give well managed hedge funds an edge. Trading advantages include superior information, lower transaction costs, better market access, size advantages, and structural inequities in the markets in which investors operate. These are the very same advantages financial institutions, including mutual fund companies, have always enjoyed. But, remember most hedge funds have greater investment flexibility than regulated investment advisors. They can profit from leverage in up markets and varying forms of short selling in declining markets, whereas most mutual fund companies can't use leverage and their only defensive option is to raise cash.
Size matters as well.
The largest mutual fund dwarfs the largest hedge fund. In today's volatile markets, the small and swift often have a distinct edge over the big and unwieldy. Incentive based compensation is a powerful lure for investment talent. Twenty percent of the profits can be a very good deal even relative to a big Wall Street salary. We do this through a variety of value added products in the high net worth, institutional, and retail marketplace using fundamental research.