Key Takeaways
- • The Teacher Retirement System of Texas ($133.2 billion AUM) partnered with Albourne Partners to develop the "1 or 30" fee model, designed to allocate 70 percent of investment economics to the investor while providing managers with revenue certainty.
- • The "1 or 30" structure replaces traditional 2-and-20 fees with a 1 percent management fee and 30 percent performance fee on alpha (returns above a hurdle rate), with the management fee effectively discounted against performance fees over time.
- • The model addresses manager revenue risk during prolonged underperformance by guaranteeing consistent management fee income while capping total manager compensation at 30 percent of alpha, creating fee alignment between institutional investors and hedge fund operators.
- • TRS currently invests across 30 hedge funds and has not disclosed specific implementation details, but the white paper's December release signals broader industry pressure to move away from traditional fee structures toward investor-favorable alternatives.
- • The innovation reflects institutional investor demand for fee transparency and alignment in response to persistent hedge fund underperformance and competitive pressure from lower-cost alternatives.
Summary
The Teacher Retirement System of Texas has introduced a novel fee model that addresses one of the hedge fund industry's most contentious issues: the traditional 2-and-20 fee structure and its alignment with investor interests. In late December, Albourne Partners released a white paper detailing the "1 or 30" approach developed with the $133.2 billion Austin-based pension fund, which has quickly garnered attention as a potential solution to mounting pressure on hedge fund fee structures.
Under the "1 or 30" framework, investors retain 70 percent of alpha (investment returns above a benchmark), while managers receive a maximum 30 percent. The model combines a 1 percent management fee with a 30 percent performance fee, but restructures how these are applied. Rather than collecting both fees independently, managers receive the 1 percent management fee on an ongoing basis while performance fees are discounted by an equivalent amount over time. Performance fees are paid only after the hedge fund exceeds an agreed hurdle rate. This design ensures that if a fund underperforms, the management fee reduction is applied against future performance fee eligibility, rather than leaving managers without revenue during extended periods of underperformance.
According to Albourne portfolio analyst Jonathan Koerner, the rationale centers on eliminating business risk to managers while meeting investor return objectives. "The simplest way to consistently meet an investor's 70% alpha share objective would be a fee structure with no management fee and a 30% performance fee, paid only on alpha," Koerner wrote in the white paper. However, such a structure would expose managers to significant revenue risk during downturns. The "1 or 30" model preserves manager income certainty while capping total compensation at 30 percent of alpha—addressing a long-standing complaint from institutional investors that traditional hedge fund fees misalign manager and investor interests.
TRS has not disclosed the specific mechanics of implementation across its 30-fund portfolio, but the white paper's release signals broader institutional pressure for fee innovation. The move reflects growing investor dissatisfaction with hedge fund performance relative to fees, and suggests that large pension funds increasingly view fee restructuring as a prerequisite for continued capital allocation to the sector.
Under the "1 or 30" framework, investors retain 70 percent of alpha (investment returns above a benchmark), while managers receive a maximum 30 percent. The model combines a 1 percent management fee with a 30 percent performance fee, but restructures how these are applied. Rather than collecting both fees independently, managers receive the 1 percent management fee on an ongoing basis while performance fees are discounted by an equivalent amount over time. Performance fees are paid only after the hedge fund exceeds an agreed hurdle rate. This design ensures that if a fund underperforms, the management fee reduction is applied against future performance fee eligibility, rather than leaving managers without revenue during extended periods of underperformance.
According to Albourne portfolio analyst Jonathan Koerner, the rationale centers on eliminating business risk to managers while meeting investor return objectives. "The simplest way to consistently meet an investor's 70% alpha share objective would be a fee structure with no management fee and a 30% performance fee, paid only on alpha," Koerner wrote in the white paper. However, such a structure would expose managers to significant revenue risk during downturns. The "1 or 30" model preserves manager income certainty while capping total compensation at 30 percent of alpha—addressing a long-standing complaint from institutional investors that traditional hedge fund fees misalign manager and investor interests.
TRS has not disclosed the specific mechanics of implementation across its 30-fund portfolio, but the white paper's release signals broader institutional pressure for fee innovation. The move reflects growing investor dissatisfaction with hedge fund performance relative to fees, and suggests that large pension funds increasingly view fee restructuring as a prerequisite for continued capital allocation to the sector.
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