This $3.8 billion hedge fund is shaking up the industry with its pay-for-performance model

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When Peter Kraus founded Aperture Investors, he deviated from the traditional active management model. Rather than raking in fixed fees, Kraus' $3.8 billion firm operates on a fee structure linked to performance, charging 30 percent of alpha. That's higher than the industry standard but since inception, about half of Aperture's funds have delivered alpha above their benchmarks. Kraus sat down with CNBC's Delivering Alpha newsletter to explain why he's focused on a pay-for-performance set-up and how he's putting capital to work in the current environment. 

(The below has been edited for length and clarity. See above for full video.)

Leslie Picker: What do you see as the key problem with the traditional model? And what do you think is the best way to fix it?

Peter Kraus: The key problem is very simple. The existing model in almost all cases, rewards people whether or not they perform. So, it's a fixed fee and as assets grow, you earn more money. Well, clients don't actually hire us to grow our assets, they hire us to perform. So, you would think the performance fee or the actual fee would be connected to the performance as opposed to the asset growth. We also know that asset growth is the enemy of performance. It's harder and harder to perform, the more assets that you manage. So, the fee doesn't help you — that traditional fee doesn't help in that regard, because the manager is incentivized to continue to grow assets, and that makes it harder and harder to perform. 

Of course, there are performance fees in the marketplace and hedge funds and private equity, but they also have rather large management fees. So, they too have some incentive to grow their assets.