If you're keeping the good stuff inside as a compensation scheme, what are you selling the public?

The abstract of The Good, the Bad or the Expensive? Which Mutual Fund Managers Join Hedge Funds? by Dueskar, Pollet, Wang & Zheng is below:

Abstract:     
Does the mutual fund industry lose its best managers to hedge funds? We find that a mutual fund manager with superior past performance is more likely to start managing an in-house hedge fund while continuing to manage mutual funds. However, a mutual fund manager with poor past performance is more likely to leave the mutual fund industry to manage a hedge fund. Thus, mutual funds appear to use in-house hedge funds to retain the best-performing managers in the face of competition from hedge funds. In addition, the managers of mutual funds with greater expenses are more likely to enter the hedge fund industry. The magnitude of such expenses is negatively related to subsequent performance in the hedge fund industry. Hence, hedge funds do not acquire superior performance for their investors by hiring these expensive managers.

We'll let the academics and the hedgies chew on this a bit more, but it does raise some interesting questions. First, the mechanic of hedge funds as a repository for over priced, under performing mutual fund managers may be good news for investors in actively managed mutual funds.

On the other hand, the issue raised in the title of this posting is worth considering.  Consider the implications: they offer internal emolument to managers of mutual funds in the form of hedge funds (platform, assets, manager compensation via carry, leverage, optionality, tax 'structuring' etc.) and perhaps subsidize them via operational cost absorption. Is that form of investment available to the preponderance of mutual fund investors? Well, the short answer is no.

Hmmm ... good for me, but not for thee.  We all know what that means for retail and smaller institutional clients. And all fully compliant, too.