I recall in the mid 1980s when people who should have known better (McKinsey consultants and analysts covering the banking industry) were adamant that banks would never cut their fees or interest rate charges (19.8%) on credit cards.
I remember thinking of the confidence over credit card pricing every time experts insisted that hedge funds (save maybe newbies) would never, never cut their famed “2 and 20” fees (2% annual fees plus 20% of the gains). Talent, after all, would always be able to command a premium.
Those charges are proving to be less than sacrosanct after all. There had been reports earlier of big established investors winning concessions, but price cutting is becoming more widespread. From the Financial Times:
The hedge fund industry, infamous for imposing high fees, is finally beginning to cut these charges amid heavy outflows and investor complaints after a year of losses.
Three hedge funds contacted by the Financial Times admitted to cutting their fees for new investors, usually by lowering management fees by half a percentage point to between 1 per cent and 1.5 per cent, and performance fees from 20 per cent to 10 per cent…..what makes the current trend striking is that the number of special deals is proliferating fast….
Guy Haselmann, a principal at Gregoire Capital, a hedge fund that invests in fund of funds, said: “Fees are coming down, and they will continue to come down . . . generally the funds aren’t kicking and screaming too badly, they want more permanent capital.”
One hedge fund manager said: “It used to be that we gave our standard rate (2 per cent and 20 per cent performance fee) most of the time. Now, new investors paying that would be in the minority.”
Another manager who recently opened a new fund said: “We have cut our fees for our latest fund, though it would be catastrophic if that got out.”
Pension funds, under pressure to regain losses, are also making a push for lower fees. A few months ago, Calpers wrote to the 26 funds managing its $6bn in hedge funds with a list of demands, one of which was a fee cut in the form of a “clawback” on fees if the fund did well after a money-losing year.
A friend with a small trust account discovered that their trustee considers “net gains” on stock transactions to mean a sum of the transactions that showed a gain.
As for the transactions with losses? Irrelevant to the calculation – even if they occur in the same quarterly statement when the fee calculation is made.
Caveat account holder, I suppose.
So much for the notion that this scary "talent" is metaphysically entitled to such obscene extractions.
It seems that where the public->to->private bailout conveyance isn't operating to prop up this "compensation", these guys are perfectly ready to bow to something closer to reality and get along on slightly less astronomical pay.
I thought these hedge funds were supposed to be the mythical sanctuary for all the poor oppressed cadres from the bailed-out entities who were being menaced with compensation caps, that all this talent could jump ship at will and go get their accustomed, god-given returns at such places.
Is this now evidence that those of us who were skeptical, who asked, "Let the scum quit; where are they going to go?", were correct?
Working at two of the largest public pension funds in Canada, it always amazed me that the big funds never banded together to demand lower fees from hedge funds and private equity funds.
The problem? Pension funds were competing against each other for bragging rights as to who secured capacity with the "best" hedge funds or who got into the "top" buyout funds.
It was ridiculous. Institutional limited partners have an organization called the Institutional Limited Partners Association (ILPA) where they discuss these issues.
Of course not all limited partners are part of this organization and some think it is to blame for the bubble in alternative investments.
The way I see it is you look at the 10-year bond yield and ask yourself will there be a compression in risk premia going forward?
If the answer is yes, then there should be a compression in fees not just in hedge funds & PE funds, but in other fees that affect Joe & Jane Smith. For example, credit card fees are modern form of usury and should be legislated a lot lower.
But as far as hedge funds are concerned, those of us in the industry know that you can replicate the median return distribution using a few futures contracts, so if you are going to pay fees, make sure it is for true alpha and not disguised beta.
Pension fund managers have to stop thinking in terms of bragging rights and have to start thinking about what is really in the best interests of their beneficiaries.
Gregoire Capital, a hedge fund that invests in fund of fundsWait a minute. So we have the underlying securities or businesses or whatever. A hedge fund decides to invest in these and exacts fees for being able to manage investors’ money well. Then, we have another hedge fund come along and invest in that hedge fund, demanding fees for being able to choose such good hedge funds. And now we have Gregoire Capital come along to invest in that hedge fund? How meta does this go? How well must the underlying assets perform in order to justify three levels of fees and compensation?!?
Just seems to be getting fairly ridiculous at this point…
For the most part, fund of hedge funds are raping their clients in fees. They typically charge 1% management fee and 10% performance fee on top of what the hedge funds charge them (2 and 20).
Only the best fund of hedge funds deserve to be paid these outrageous fees and even then, they too got clobbered in 2008. I am not sure what their value added really was in 2008.
So why do pensions typically invest via funds of funds? Because they lack the internal expertise to invest directly into hedge funds and because they want to cover their asses in case those investments head south.
Worse still are those pension consultants who charge fees to recommend funds of hedge funds or funds of private equity funds. Most of them have serious conflicts of interests, recommending funds they invest with. This should be criminal.
Last September, I wrote that the shakeout in hedge funds will be brutal and it will be worse for funds of funds, many of which will close their shops.
Leo makes some good points
reality is: 2 up 20 makes no sense at all if you’re not making a gross return of at least 15% annually on a consistent basis for the risks one is taking by investing in alternatives
few of the larger hedge funds can generate that kind of return today – so wise up all you investors -demand value for money or stick your allocation into an index tracker which may charge you less than 50bps… for similar risk profile