Ross M. Miller is out to change investors' ideas of what's a bargain and what isn't in money management.

When you consider carefully what you are paying for, he says, hedge funds may not look as costly as they are often portrayed -- and mutual funds may be "more expensive than commonly believed."

Research by Miller, president of Miller Risk Advisors, a credit and portfolio risk management consultancy, may find its main audience among professionals. But its way of looking at fund costs can serve as an eye-opener for individuals, too.

The standard image of hedge funds, or private partnerships designed for wealthy investors, casts them as high-cost propositions, with the typical manager charging 1 to 2 percent of assets per year plus a 20 percent slice of the profits. That stacks up unfavorably against fees of 1 percent or less at some popular mutual funds. Miller says this comparison is flawed.

"Mutual funds appear to provide investment services for relatively low fees because they bundle passive and active funds management together in a way that understates the true cost of active management," he writes in a working paper. To get a more accurate picture, he said on the telephone, "you cut the stuff in parts and reallocate the dollars."

Much of the payoff produced by an all-stocks-all-the-time mutual fund may be seen as coming from market return, known in the business as "beta."

If a broadly diversified large-stock fund is up 15 percent in a year when the Standard & Poor's 500-stock index rises 12 percent, an observer can conclude that all of the fund's gain wasn't achieved via pure stock-picking skill. Maybe only the top 3 percentage points represented the result of skill, or "alpha."

As Paul McCulley, managing director and fund manager at Pacific Investment Management Co., put it recently in a different context, "Remember, benchmark performance -- beta -- can be had for virtually free; alpha is what active managers are paid to generate."

Suppose in our example that the first 12 percentage points are deemed an index return, worth no more than an index fund manager's fee of, say, one- to two-tenths of a percentage point of assets per year.

Seen in this light, the portion of the fund's fee that is higher all goes to pay for the last 3 percentage points of gain. Call that the "active expense ratio."

"At the end of 2004, the mean active expense ratio for the large-cap equity mutual funds tracked by Morningstar was 7 percent, over six times their published expense ratio of 1.15 percent," Miller writes.

Now, the case can be argued that returns don't lend themselves to being so cavalierly split this way. How can you do that with some tried-and-true active manager who doesn't manage against any market index, but picks stocks one by one on their fundamental merits?

Like it or not, however, the active manager is open to competition from believers in the idea of separate pieces. A big client can say to the manager, "Instead of buying your fund, I'm going to put 80 percent of my money in a low-cost index fund and the other 20 in a hedge fund. I'll buy my alpha from the hedge fund and my beta from the index fund."

The day may be a long time off when rank-and-file mutual fund investors get so fancy in their shopping for money-management services. As long as they can get a decent return on their money, fees have ranked low on their priorities.

Even so, the increasing role of intermediaries such as investment planners has helped make costs a more prominent issue. Who's to say enterprising fund managers won't come along sometime soon with packages, aimed straight at small investors, put together using alpha and beta from separate sources?

As thinking like Miller's gets around, it promises to intensify a big challenge that already looms for fund managers. That will be to convince increasingly sophisticated investors, and keep them convinced, that active money management is worth its extra costs.