In the History of the Peloponnesian War, Thucydides
that guy you were forced to read in college history
wrote, The strong do what they can, and the weak
suffer what they must.
His adage finds expression today in the power asymmetry
between asset managers (the strong) and asset owners (the
weak). While asset owners, like the people of Melos, might like
to believe that they hold a position of parity with asset
managers, theres little evidence to support that.
This power asymmetry is clearly manifested in misaligned fee
schedules and liquidity terms, and in the often infuriating
passivity with which asset owners consume the products offered
up by asset managers.
In spite of these minor inequities which
asset owners tolerate and perhaps moderate through private
negotiations (i.e., side letters) and strategic
partnerships the elemental compact between owners
and managers has remained firmly in place, reliant on the
belief that asset managers would place their clients
interests ahead of their own and act as good fiduciaries.
It appears this compact has been compromised.
As a brilliant young deputy CIO recently told me
without a hint of irony or disbelief some of the
largest well-known, blue-chip hedge fund managers
have eliminated any reference to fiduciary duty from their
investment management agreements.
And, perhaps even more Trumpian than President Trump
himself, they are telling prospective investors that they will
engage in activities that will not be in their clients
Furthermore, the deputy made clear that these asset managers
consider that proviso nonnegotiable: There is sufficient demand
for their products that asset owners either accept the terms or
step aside for the next in line.
Here is the fullest expression of the imbalance between
asset owner and asset manager. In renouncing fiduciary duty,
asset managers are explicitly recalibrating the power structure
of the ownermanager relationship to a position of extreme
asymmetry: I owe you nothing. You have no leverage other
than investment. You are powerless in this
This is a salespersons dream and a CIOs
My anecdotal research supports this charge of asset
managers refusal of fiduciary duty, with a small number
of managers in the vanguard. It also reveals this to be a
fairly recent phenomenon. Asset owners confirm that as recently
as five years ago they could get just about whatever terms they
wanted in a contract. Perhaps the wall of money from public
funds into the hands of a few hedge funds and private equity
and venture capital firms precipitated this change but
whatever the cause, this is a seismic shift in the power
The seizing of this power by asset managers could be
characterized as a rational commercial response to maximize the
value of their businesses (such as, fiduciary duty is the
ultimate portfolio constraint vis-à-vis the fundamental
law of active management).
However, paraphrasing technology theorists Vasilis Kostakis
and Michel Bauwens, this newly defined asymmetry creates and
propagates an artificial scarcity of knowledge, subjecting
innovation to contrived restrictions and allowing for profit
maximization and capital accumulation. The result is both
paradoxical and dramatic: While this power structure cannot
produce the desired risk-adjusted returns net of fees, it
simultaneously inhibits the development and deployment of new
solutions that could meet the needs of asset owners. Put
simply, the increase in these managers assets under
management and their ability to act in their own best interests
has completely failed to result in a corresponding uptick in
innovation or in performance.
On the other side, asset owners acceptance of this
extreme asymmetry is hardly rational because it provides, at
best, access a benefit that is incommensurate with the
abdication of fiduciary duty (after all, its not like
they are getting access to the Medallion Fund).
Its important to recall two things: The asymmetry
between asset owners and asset managers (even in its weakest
form) is a relatively modern phenomenon, which can be traced to
the late 1960s, when we saw the formation of the first
independent institutional investment management firms and
investment consulting firms (and the start of Institutional
Second, in base terms there are no institutional managers
without asset owners.
Asset owners source of power is their ability to say
no to reject the status quo coupled
with their ability to allocate large sums of patient capital.
My deputy CIO expresses his power every time he walks away from
disadvantageously structured deals. But such discrete acts of
protest will change nothing.
Actual change will require asset owners to be genuine, vocal
advocates for their beneficiaries individually, through
acts of rejection of misalignment and transparent
communication; and collectively, through active participation
in asset ownerdriven organizations seeking to reset the
fulcrum in the balance of power (e.g., the Alignment of
Interests Association and the Institutional Limited Partners
In a word, asset owners need to act like the fiduciaries