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Pension Funds Propose Hedge Funds Should Meet Benchmarks Before Charging Fees
With the average hedge fund down 1% year-to-date, it is perhaps no surprise that investors are pushing back against the fee structure...
Authored by Ted Ballantine via Pension360,
Pension funds and other investors called for changes Tuesday in the way hedge funds charge fees.
The proposed changes were outlined in a statement by the Alignment of Interests Association (AOI), a hedge fund investor group to which many pension funds belong.
The group said that hedge funds should only charge performance fees when returns beat benchmarks, and that fee structures should better link fees to long-term performance.
More details from Bloomberg:
The Teacher Retirement System of Texas and MetLife Inc. are among investors that yesterday called on managers to beat market benchmarks before charging incentive fees in a range of proposals that address investing terms. Funds should base performance fees on generating “alpha,” or gains above benchmark indexes, and impose minimum return levels known as hurdle rates before they start levying the charges, said the Alignment of Interests Association, a group that represents investors in the $2.8 trillion hedge fund industry.
“Some managers are abiding by the principals to some extent but we are hoping to move everyone toward industry best practices,” said Trent Webster, senior investment officer for strategic investments and private equity at the State Board of Administration in Florida. The pension plan, a member of the association, oversees $180 billion, of which $2.5 billion is invested in hedge funds.
[…]
To better link compensation to longer-term performance, the AOI recommended funds implement repayments known as clawbacks, a system in which incentive money can be returned to clients in the event of losses or performance that lags behind benchmarks. The group said performance fees should be paid no more frequently than once a year, rather than on a monthly or quarterly basis as they are at many firms.
AOI also called on the hedge fund industry to lower management fees – or make operating expenses more transparent so higher management fees can be justified. From Bloomberg:
Management fees, which are based on a fund’s assets, should decline as firms amass more capital, the investor group said.
“We need good managers, not asset gatherers,” Webster said. “The incentives are currently skewed.”
[…]
Firms should disclose their operating expenses to investors so they can assess the appropriateness of management fee levels, the group said.
“Management fees should not function to generate profits but rather should be set at a level to cover reasonable operating expenses of a hedge fund manager’s business and investment process,” the AOI said.
The fees should fall or be eliminated if a manager prevents clients from withdrawing money, according to the group.
Hedge funds typically utilize a “2 & 20” fee structure; but in the second quarter of 2014, hedge funds on average were charging “1.5 & 18”.
* * *
As we concluded previously, as Reuters reports, the redemption flood has finally arrived and "client requests to take out money from hedge funds rose to an 11-month high in November, data released on Thursday showed."
The SS&C GlobeOp Forward Redemption Indicator, a snapshot of hedge fund clients giving notice to withdraw cash expressed as a percentage of assets under administration, rose to 5.05 percent in November from 3.12 percent in October and the highest since December last year. The index is compiled by fund administrator SS&C Technologies Holdings Inc and is based on data provided by its fund clients, who represent about 10 percent of the assets invested in the hedge fund sector.
Our condolences to the hedge funds, most of them, who for the 6th year in a row failed to outperform stocks: it probably will be your last. But feel free to send your complaints to the No Rat's Asses to Give Here Department at the Marriner Eccles building c/o Janet Yellen and her Princeton- and MIT-educated central-planning peers around the globe.
And look at the bright side: since in the current risk-free, centrally-planned environment, virtually all hedge funds are assured a quiet, painless (one hopes) death, you will at least have a head start on your peers, who are still in the industry betting it all on lucky year 7, and maybe learn an actual skill that has practical uses in the real world aside from just clicking a red or green button.
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That's a novel idea, rewarding after performance.
Who came up with taht ?
I have a modest proposal. An alternative to that very complicated, well-reasoned plan in the article:
GO MAKE SOME DAMNED MONEY. Make money for people, they bitch about the fees a lot less.
High water marks for relative performance. And drop the base 2% type horseshit.
30 years ago when Hedge Funds were just getting popular, started up.... whatever.... I always wondered about the George Soros types.... guy seemed fishy/Tavistock type... and my suspicions were confirmed when about a half dozen bond salesmen.... That's right Sales Men I knew went out to start Hedge Funds. Never ran any money in their lives except pickpocketing the Muppets.
Fees will only be increasing as a return of true captial is getting harder and harder to do, let alone return some interest on that captial. I see more hedge funds shutting their doors myself.
why are pension worried...OBama and the Demos will rescue any pension. They will rescue anyone that donates enough money
not that im calling a market top, but CALPERs pulling the plug on hedge funds is the sort of moment you would look back on and say that was the top
just wait til the market has either a flat-to-down year(s) - then the pensions will come & offer 4 & 40 for HF services since they have no clue how to make $$$ asides from buy & hope. these pension funds know their f'd; anyone who has to "guarantee" 8% per year should be sharing a bunk with madoff because its a lie right out of the gate they KNOW they can't sustain over the long-run.
mean reversion is gonna be such a bitch for these guys. they better pray rates never lift. if that ever happens, its GAME OVER. i love this whole "it will be good for the market if rate rise for the right reasons". when the fugg have rates ever been raised "for the right reasons?"
I can just hear Fraud Street.......Oh F**k!!!!
Good luck with that...
No more 2/20?
The top is in when you can't charge a premium for "personal financial massages".
Who would pay for a massage without a "happy ending"?
Oh, right; Pension Funds.
Regards,
Cooter
but but pensions and other "investors" are supposed to be the dumb money ... hoo will wall street dump the dreck on (and still get a fat fee) if they get uppity?
Hedge funds will usually do worse than the index because they are hedged. The point of hedging is to minimize risk. A properly hedged portfolio will contain domestic stocks, foreign stocks, domestic bonds, foreign bonds, gold, various currencies, and derivatives. An everyday investor's primary goal is to get rich. A hedge fund's job is to preserve wealth.
Slow and steady wins the race. It's much better to consistently make 10% per year and never take a loss than to make 20% per year but occassionally take a 30% loss.
If an institutional speculator thinks it is paying a hedge fund too much, it should fire the fund or refuse to renew its contract. Then it should hire new funds who will charge 20% to 50% of profits and pay a penalty of 50% of losses.
It would be interesting to see if there were any takers and what kind of hedge fund would offer or accept such a deal. Are there any funds that promote and accept such pay performance deals?
I dont charge any fees, why should hedge funds. Of couse i dont tell you to buy the S&P over 2000 either. You get what you pay for.
japan 10yr yield 0.40% ... think that is the record
This is funny. The idiots that invested want to use the hedge fund like an ATM (ass-to-mouth) machine.
WTF ever happened to financial prospectus?
"The fees should fall or be eliminated if a manager prevents clients from withdrawing money, according to the group."
No, consent only theft. Fees are rents, ill gotten.
That would first require a fairly valued system of trade to be of primary imortance.
Hire a Japanese hedge fund manager. If the fund goes down, he kills himself.
Top is in. When slow asset allocators start pounding their chest bc Fed is trying to bail their broke asses out with low-cost, passive equity returns, the shit is about to melt in their faces, and they'll yearn for the days of lowly-correlated multi-asset alpha, not this fucking excess reserve levered beta nonsense.
Sorry for the Top trigger. That top is not in, it should have been in at
1992, but oh no. No i didnt short i just moved into bonds and cash. So i saved my ass and i want a cookie.
The Fed cant break ever, so stop looking for it.
What you should look for is a much smaller pie, growth if you need to look will be in Africa, since its the only place that can grow. Sure Asia this and that but no desire or need for the farmers to kill other farmers. But in Africa kiling is not new or prevented by the culture. So look at farming grains, cattle and yes fish. So thats your growth for the next 6 years. That ebola was just to kick people off there land, get some low cost or free shit and to move to more stable players in a market that would have died a long time ago.
What the heck is my pension money doing in a hedge fund ?
I meant your money.
This would be so easy. Here, I'm Mr. Manager, and you say I only get paid if I beat the SP500? Well, let me call my buddy, Bananarepublicmanager2, and we'll both buy penny stocks, and only penny stocks. Look! We beat our returns by 100000%! So now I get to charge my charge, then when it comes time to try to sell, voila, oh we didn't beat the market, and we are closing shop, but thanks for the free money.
On the other hand the " village idiot" that pays the "fund manager" gets hoodwinked into thinking the "fund manger" is going to make him/her MOAR than 2/20 in a month.
I'm being facetious, but you can see how these "pipe dreams" can get out of hand.
I just threw up in my mouth a little, thinking of all the happy faces of that account statement.
"So i can retire now" Well only if you can sell this book to the Fed at face value.
"Can i text them on my iphone?"
I dont even want to know.
BB-Q I'm really starting to like you. I'll bet you make a fantastic bratwurst.
What kind of moron would let them collect performance fees on a quarterly or monthly basis? Even medium and long term losers would rake in massive performance fees.
And people say retail investors are stupid.
Why work and actually produce something of value to society when you can just sit back and skim a percent of millions in captive assets?
Thanks Yellenallenanke!
This is not sarcasm. Ironically you are being truthful about the state of US Working World.
- Lawyers
- Lobbyist
- Military Contractors
- Tax Accountants, Finance Lawyers, Off Shore Experts
- Politicians
- Financial Managers
- Insurance Managers
- TBTF Wall Street Bankers
I might be wrong about the above. It is not my intention to piss off people that work hard on the books or planning financial moves. But the System is Rewarding Looting, Evasion of taxes, Depaitalizing US Industry, Suppressing Wages, Terminating Pensions & Retirements through Mergers & LBOs... Finance is Warfare Against Americans.
Educate me here. How do we explain the Looting of Corporations, Destroying of Good Jobs, tax Evasion, Moving capital Off Shore for Production to Cut US Labor, US Costs, US Taxes, US Exposure,... These are Financial Moves.
Financial Strategies CAN BE Anti-US, Anti-US Economy, Anti-US Consumption.
It's absolutely incredible how completely f*cked up every aspect of the world has been throughout human history just because of finance.
Thanks.
I might be wrong about the above. It is not my intention to piss off people that work hard on the books or planning financial moves. But the System is Rewarding Looting, Evasion of taxes, Depaitalizing US Industry, Suppressing Wages, Terminating Pensions & Retirements through Mergers & LBOs... Finance is Warfare Against Americans.
The problem is that virtually every private enterprise is dependent upon government largesse. You can add healthcare, governmental workers, virtually all retail, and virtually all service jobs to the list. If you really want to reward productivity, then there are but a few professions that are productive in the classical sense. The point being that private enterprise is impotent to change because of capital costs/debt, which requires an entirely new (and dramatically lower) price structure.
Educate me here. How do we explain the Looting of Corporations, Destroying of Good Jobs, tax Evasion, Moving capital Off Shore for Production to Cut US Labor, US Costs, US Taxes, US Exposure,... These are Financial Moves.
Simple, it can be explained in one word... competition. Some people wear gloves in the ring, some people lose.
Thanks, but competition doesn't go far enough to explain a war on the Idea of America or war on the Middle Class.
Maybe Greed is the one word.
In forming a Government we have to deal with human greed, recognized human greed, fraud, book cooking, corrupt auditing, systematic corruption of accounting & auditing rules... etc.
War is another problem with calling it competition. The country was founded with these ideals, christian ideals, equality, freedom, liberty, justice... all of that is against foreign wars.
but we will take you to a strip club and our box seats to any sporting event you want.
Damnit! I work for a top FCM/Prime Broker and I really want to spill the beans about my industry but I'd probably get fired..
Ahhh screw it.. Here's the deal. Most hedgies on the street do a pretty poor job of managing institutional assets, ie the savings of workers imbedded in pensions, foundations, and endowments. Most hedgie managers got their start at Wall St banks, break away and take their friends and colleagues with them. More and more now since Doddy Frank killed our prop desks. They make a few calls to their old Cap intro buddies and before you know it there's a $100mm mandate in their back pocket, sometimes with little or no track record. Then every Prime Broker comes calling for their execution and clearing business. A few Nicks games and strip clubs later, the docs are signed and the portfolio is levered up 5x. And then the gambling begins, CDS, malaysian palm oil futures, PIK corporates, if you can imagine it, they are gambling it.
Why do HF returns continue to suck? They're all in the same damn zero sum trades!
The only people making money in hedge funds are the managers, their prime brokers, and the exchanges.
I have a novel idea, embrace free-market principles, do your own due diligence, and don't invest in them if they don't perform. The underperformers will wither off and die.
I thought the new paradigm is to invest with other peoples money, use other people, use other peoples money to create a career, ... as American as the Peacock, we Strut around with our minions or our think tank like our crap don't stink.
6 Million Bankers in USA almost. Many serve the Federal Government and build their Cult of Personality there.
- The Cult of Personality seems to point back to Stalin, but history is wrong here, how does USA implode the Global Financial World without massive Criminal Imprisonment and Sweeps for Data, computers, and Subpoenas??
- How do we characterize both government & private finance today?
A. I attract money through Marketing, propaganda, riding trends, and a cult of personality... then Invest free of Risk and take a percentage
B. I Strut for Government Officials, drop hints on investing & trends, make the right contacts, network to get hired for a while in Federal Government... Plan my exit in a manner than Leverages my experience, try to preserve my network & contacts
Let's look at the FACTS, instead of hypoerbole and BS. Market is 25% above historical mean/median Market is 68% above historical Schiller PE10 http://www.multpl.com/
Right on!
No freaking kidding!
More lies and propaganda from Zerohedge.
TRUTH: Assets at hedge funds his a RECORD of $2.8 TRILLION.
there are lots of funds that beat the market and do so with little volatility
they aren't managing out side $$ anymore for a reason and they are there to take off the wealth from the pikers
Fucking funny.