Isn't having the right incentives as a fund manager the most important thing? I obviously wouldn't want my fund manager to index his own money, but I wouldn't even want him to buy something without himself also buying it at the same time. If there's a scenario where the LP's end up owning a certain stock and the manager has a 0% allocation that would be very far from optimal.
By getting the incentives right, you don't have to trust your manager to constantly do the ethical thing against his own (v human) profit motive. A couple examples if the managers portfolio differs from LP portfolio:
- Less time investment in his smaller / missed positions.
- Smaller or 0% positions mean he has cash which he presumably wants to invest, so he might add to existing holdings or even new holdings. Which creates new warped incentives.
Essentially, I think the gain in EV of being the first to buy and the first to sell as an LP, is offset by the loss in EV of incompatible incentives.