The hedge fund model has been under attack for at least decades since the financial crisis, but assets under management continue to surpass records. Christopher Ailman oversees the country’s second largest public retirement fund, CalSTRS, with $ 300 billion in assets under management. Here he talks to Leslie Picker about the high cost of providing alpha.

The following content has been edited for length and clarity.

Leslie Picker: Chris, I want to ask you very clearly: do you think active managers deliver alpha?

Christopher Ailmann: I’ve been hiring active managers since the mid-1980s, with a wide variety of funds. Well, those were all government plans, so maybe that’s a caveat that I have to add. Our active managers in US stocks added value and produced alpha, but not after fees. And that is the critical point. I think Alpha is expensive, hard to find, but the price is too high. And so the net even over a period of one year, three years, five years, or even a 10 year period, we have seldom seen managers achieve constant value minus fees.

Picker: So if hedge funds were to cut their fees, how much would they have to go to trick you into investing more money in this area?

Ailmann: Well, I said a long time ago that I think the 2 and 20 model in private equity real estate and hedge funds is broken. And for a fund of this size like us, we don’t pay the classic 2 and 20. So that’s part of the key. And I’m a fan of profit sharing, I think an incentive for the manager and profit sharing makes sense. The problem is, it only goes one way. They divide on the top, they don’t get hit on the bottom. And we haven’t found a way to make a good plan for it yet.

Picker: Why hasn’t the industry rejected the 2-and-20 model so strongly? Why do you seem to have a somewhat contrary view in this regard? I’m sure people don’t like to pay 2 and 20, but they keep doing it.

Ailmann: I have to say # 1, good marketing, but it’s also the cool place to invest. People love the idea of ​​being in a hedge fund because it sounds mysterious and great. Hedge funds did really well in the late 1990s because they diversified outside of TMT, they did well in 2007, but the best performers were the funds with the least added value. If you are a huge investor like us we are going to flood your AUM and make you really invest in more strategies than you want to. So I think the wealth for this area will continue to grow. First, because it’s an interesting place to invest, it sells, it has a good selling point. That doesn’t mean it will produce sustainable results in the long run.

Picker: I want to pan a little and talk to you about what the hedge fund industry has seen this year. I mean, they were the disruptors of Wall Street three decades ago. And now they’re really playing a defense against a number of new retailer disruptors that don’t charge a 2 and 20. You can take as much risk as you want because you only worry about your own capital, you don’t have to worry about losing the capital of CalSTRS or the capital of family offices. Do you think this will change the hedge fund industry? Do we want to look back and say that this is where the upheaval took place?

Ailmann: The answer is yes, Leslie. I think for a really short time the hedge fund industry was seen as cool and these people were great. They just started up and are despised. I’m not surprised to see that all the young people in the hedge fund industry want some meat. People under 20 don’t like the establishment. I was in the baby boom, we didn’t like the establishment, now we are the establishment. So I don’t think it will get rid of the hedge funds. But I think this is actually a really interesting change that we are seeing. They said their transaction costs are zero. You can trade stocks for free. You can do this on your phone wherever you are. So the efficiency and effectiveness of their work is so quick. Now they are speculating and they are just acting fast so don’t invest. But I think some of the different apps that are designed to force this generation to save are huge. In previous generations, people didn’t start investing until they were 40 or 50. You have a whole generation that is now saving for the first time. And yes, they speculate, they invest in cryptocurrencies. Speculation in and of itself is not good and you will learn some hard lessons, but you are starting to save up and that is enormous. If they can now figure out how to do it in the long run and get compound interest, they will really be a little better off as a generation.

Picker: There have been some people who have said that the speculative activity out there has been disruptive and has affected confidence in the overall market. Do you think this type of behavior needs to be regulated?

Ailmann: I would say no, not at all. The market will correct itself. We saw that in media, telecommunications, and technology stocks in the 1990s. You can get the Dutch tulip craze in [1600s]. You see periods of rampant speculation, exorbitant prices, ridiculous prices, the markets correct and it comes back, people learn a hard lesson. Perhaps those communications networks need regulation and that kind of herd mentality that was clearly a crowd seems to go on after you’ve been trading at five times the float of a stock on a daily basis. Short squeeze was already on the market in the 1930s and 20s. So it’s a natural part of the market. That’s unusual, it’s disruptive to, I’m just saying, mature people like me who like a stable market, but it’s not bad. It’s about engaging and actively engaging the young audience and learning how to tolerate risk.

Chinese migrant workers take a rest at a gas station after riding a motorcycle on January 25, 2019 in Zhaoqing, Guangdong province, China.

Wang He | Getty Images News | Getty Images

BEIJING – After years of trying to make it in the cities, China’s migrant workers are returning home.

An aging population, high cost of living, and new areas of business such as live streaming e-commerce are all helping to reverse the metropolitan rush that has shaped China’s economic expansion in recent decades.

Millions of Chinese people did not return to urban areas to work after the coronavirus pandemic last year, official data shows. According to the statistics office, there were still 2.46 million fewer migrant workers at the end of March than in the same period in 2019.

“Rural-to-city migration slowed even before Covid and had its first decline in 2020,” said Dan Wang, chief economist in Shanghai at Hang Seng China.

“The reverse migration will gain momentum in the coming years, partly because [the workers] cannot afford housing in the city and have no access to city health care, ”said Wang. An important factor she pointed out is aging – the proportion of migrant workers over 50 has more than doubled in the past 12 years to 26%.

Data already shows that more migrant workers are staying in the same province close to their home country instead of traveling to China’s largest cities like Beijing or Shanghai.

Government policy has also contributed to this trend.

As the state loosened its hold on the economy in recent decades, tens of millions of Chinese went to jobs in major cities like Beijing and Shenzhen. Local governments built subways and other urban infrastructure to support growth.

However, many migrants have faced tough working conditions as workers in factories or, more recently, as couriers for China’s e-commerce giants. A strict system of residence – called “hukou” – prevented migrants from accessing public health care and schools or buying property in their city of work. The flood put a strain on local resources and prompted authorities to evict migrants.

Smaller cities like Xi’an have tried to attract a highly skilled or well-educated workforce by offering benefits such as residency status.

Stay at home and stream live

China has tried other types of urbanization – building infrastructure in rural areas. These efforts contributed to Beijing’s goal of alleviating extreme poverty, a promise the government said it had fulfilled last year.

Official figures showed that 1.6 million more people returned to the countryside last year than in 2019 to start business with the help of subsidies. Just over half of the entrepreneurial projects focused on the use of live streaming and other online methods of selling products, according to an official report.

Many people outside of the big cities take jobs in this so-called digital economy as they can work remotely for companies that may still be based in city centers.

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Qingtuanshe, a job search platform within the Alipay mobile app, said that livestream host and related job releases increased significantly over the past year. The company added that the proportion of workers for these jobs has increased from Tier 3 and Tier 4 cities.

And among the many small businesses that have popped up in the industry, Beijing-based PR firm Vyoung claims it receives calls from 20 to 30 people – increasingly from smaller cities – every day to discuss influencer partnerships with big fashion brands .

According to reports from pro-government agencies, the digital economy now accounts for well over a third of total GDP, compared to more than 50 million people in rural areas using the internet last year.

Even if it is no longer easy for newcomers to the live streaming industry to become stars, the market needs more influencers in the “middle” segment, said Jialu Shan, economist and researcher for Asian and emerging markets at the International Institute for Management Development.

The explosive growth in live streaming over the past year has been accompanied by many complaints about counterfeit products and a high response rate, Shan said. She believes the industry can now mature to a healthier state while there is still untapped opportunities in niche areas like services.

Bigger economic challenges

However, it is still unclear how much the digital economy can contribute to growth. Retail sales have grown more slowly than expected and the proportion of online sales is stagnating – a concern for an economy that tries to rely more on individual consumption.

In the first quarter, consumer optimism surged across all income levels, but spending remained subdued, according to a survey by the Ant Group and the Center for Household Finance at Southwestern University of Finance and Economics.

In high-end tech industries like semiconductor industry, Chinese leaders have warned of a talent shortage, and China’s premier Tsinghua University even established a chip-focused college in April.

The labor shortage means that for now there is a steady group of high-tech talent who “just want to jump around in several specific companies,” said Yin Zheng, director of product marketing at Moka, a recruiting-focused human resources company. The company said its corporate clients are mostly larger corporations and large tech companies.

Employee mismatch

For the majority of workers with less education, moving to smaller cities or back to the countryside can lower the cost of living. But salaries are lower, adding to China’s growing income inequality.

Analysts at the Chinese investment bank CICC said in a report this month that both the unemployment rate and job search have risen in the lower labor market since the pandemic, reflecting a divide between employers and workers.

Official data showed that the unemployment rate – based on a survey of all city dwellers – fell to 5% in May, but cities had created 230,000 fewer jobs during the year than in the same period in 2020.

The Bureau of Statistics did not provide updated figures on migrant workers at its last press conference this month.