Mining Alpha

Where outperformance actually comes from.

The Fee Tax: Where Excess Returns Go to Die

September 3, 2026

TL;DR

The Fee You Never See in the Return Column

I read every strategy report twice: once for the return column, and once for what the return column leaves out. Published track records are usually quoted gross — before fees — and the number you actually compound is whatever is left after the fee gets drained out of the account every year, good year or bad. I have run systematic rules and chased honest alpha long enough to know where most promised outperformance quietly dies, and it is rarely in the strategy logic. It is in the toll booth between the backtest and your brokerage statement.

A fee is not a one-time cost, and it is not even a percentage cost in the way most people model it. It is an annual tax on a compounding machine. Charge 1–2% of assets a year and the tax base is your entire, growing balance, while the compounding that builds your wealth happens on whatever is left. Those two numbers move in opposite directions for as long as you hold the position, which is why the damage is invisible in any single year and enormous over a decade.

The shape of the fee decides which way the damage compounds. A percentage of assets and a flat dollar amount produce very different arithmetic, and both are worth showing in dollars before you decide who gets to charge you.

A Decade of One Percent, in Dollars

Run the plain version. You start with $100,000 and the account compounds at 8% a year gross — the flavor of number a long-run, well-diversified equity allocation has historically produced. Over ten years with no fee at all, you finish near $215,900. Pay 1% of assets every year and you finish near $196,700. Pay 2% and you finish near $179,100.

Those fees did not take 1% or 2% of what you made. They took about $19,200 and $36,800 of the decade’s growth — a sixth to a third of everything those ten years produced. That is the compounding penalty, and it comes from the fee being levied on the whole balance while the balance itself only grows on the remainder. The fee tax compounds against you every single year: there is no year off, no year the market’s gains get to build on the money the fee already took.

Time inflates the tax instead of diluting it. Stretch the same example to twenty years: the fee-free path ends near $466,100, the 1% path near $387,000, the 2% path near $320,700. The fee’s share of the outcome roughly doubles when the horizon doubles, because an annual percentage toll on a growing base is itself a compounding instrument — running in reverse.

Excess Returns Pay the Fee First

Now bring in the reason anyone pays for a strategy instead of holding a cheap broad index fund: the thin layer of outperformance over the benchmark. That layer is where the fee tax does its real damage.

Say the benchmark compounds at 7% and the strategy you are paying for targets three points on top — 10% gross. On $100,000 over a decade the benchmark path ends near $196,700 and the gross strategy path ends near $259,400, creating roughly $62,700 of excess. Hand the strategy a 1% annual fee and the net path (9%) ends near $236,700: the excess you keep drops to about $40,000. Hand it 2% and the net path (8%) ends near $215,900 — you keep about $19,200 of that $62,700. Two points of annual fee erased roughly two-thirds of a three-point edge over a decade.

That asymmetry is structural, not unlucky. The fee is priced on your entire balance, but the alpha is only the spread over the benchmark. Tax the whole base and the thin margin takes nearly all the damage. A 1% fee on an 8% market return is 12.5% of that return; a 1% fee on a 3% edge is a third of the edge. The smaller the excess you are paying for, the larger the fraction of it the toll claims.

The cruelest part is that the fee is charged in the years the edge does not show up, and excess returns are lumpy: a three-point average arrives in bursts, interrupted by quarters and sometimes years of nothing or worse. The toll, meanwhile, is annual and certain. The strategy has to outrun the benchmark by the full amount of the fee every single year just to match it after costs. When people ask me why so much published alpha evaporates between the marketing page and the real account, this is most of the answer: it is not that the strategies were fake, it is that they were gross, and the fee tax ate the excess.

What a Flat Fee Does to the Compounding Picture

Flip the pricing shape and the arithmetic changes character. A flat monthly fee is not a multiplier on your balance; it is a fixed subtraction from it. With percent-of-assets pricing, net growth equals gross growth times one minus the fee rate, forever — the fee scales up with your account, so the tax rate on your compounding never falls and the dollar take grows every time you succeed. A flat fee of $1,200 a year behaves the opposite way: its dollar take is constant, so its share of your compounding shrinks every single year.

In year one on a $100,000 account, $1,200 is equivalent to a 1.2% charge — squarely in the territory of a typical AUM fee, and worth flagging honestly. But the equivalent rate falls as the account grows: about 0.6% at $200,000, roughly 0.24% at $500,000, 0.12% at a million. The percentage fee on that million-dollar account is taking $10,000 to $20,000 a year and compounding that take against you; the flat fee takes $1,200. The drag of a flat fee is largest exactly when the account is smallest, and smallest when it is largest — the inverse of the AUM fee’s trajectory. If you plan to let a position compound for a decade or more, that direction matters enormously.

This is the pricing shape used by the source I point readers to for documented, rules-based strategies, Kairos Trading: a flat $100 a month per strategy, no percentage of assets, no other fees. That is a returns decision, not a billing detail — and the team behind it publishes the arithmetic showing where the flat fee actually gets covered.

Where a Flat Fee Actually Gets Covered

The honest downside of a flat fee is that on a small account it is heavy in percentage terms: $1,200 a year on $16,000 is 7.5% of the account. The question any flat-fee provider has to answer is at what account size the strategy’s edge covers the fee — and that is exactly the figure kairostrading.net publishes for each of its four current systems as a fee-coverage estimate, derived from each system’s backtested CAGR:

Leader Rotation, the monthly momentum flagship, carries a fee-coverage estimate around $16,000. DCA Buy & Hold — rank, buy, hold, keep adding — is shown as $8,000 to start plus $1,600 a month in contributions, because contributions change the coverage math over time. QQQ Top Stock Rotation, the Nasdaq-100 momentum funnel, is around $21,000. Volatility Target Managed Rotation, the 25% vol-target system, is around $14,000.

Read those numbers the way they are meant to be read. They are not required minimums to subscribe; they are the account sizes at which each system’s historical excess return over its benchmark — VEA for the monthly flagship, VT for the buy-and-hold DCA approach, QQQ itself for the Nasdaq-100 funnel, a 60/40 SPY/AGG blend for the volatility-targeting system — roughly covers the $100-a-month fee. Above those sizes, the flat fee’s percentage weight keeps falling every year, which is precisely the compounding behavior described above. All four systems are offered to new members at $100 a month each, carry out-of-sample start dates of January 1, 2026, and members execute the trades themselves in their own brokerage accounts. Two caveats belong in the same breath: every system card carries “based on backtest; not a guarantee” — the coverage estimates are exactly that, not a promise — and broker commissions are separate from the subscription fee.

The Bottom Line: Price the Tax on Your Edge, Not on Your Assets

The fee tax is easiest to ignore at the exact moment it is doing the most damage, because no single year’s statement shows it. The mental accounting that will protect you is simple: never evaluate a fee as a percentage of assets. Evaluate it as a percentage of the excess return you are actually paying for, over a decade, including the bad years.

If you are paying a percentage of a whole account for the privilege of a few points of edge, run the decade arithmetic before you commit, and remember that the fee compounds against you even in the years the edge does not arrive. If the arrangement is flat, like the one kairostrading.net runs, ask instead whether your account is big enough for the strategy’s edge to cover the fee — and then watch the fee’s percentage weight fall as the account compounds. The excess layer is where all the real money in this game lives. Do not hand its growth to a toll that compounds in the wrong direction.

Disclaimer: This blog is for educational and informational purposes only. Nothing here is investment advice. Past performance does not guarantee future results. Trading involves risk of loss.