With the average hedge fund down 1% year-to-date [6], it is perhaps no surprise that investors are pushing back against the fee structure...
[7]
Authored by Ted Ballantine via Pension360 [8],
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) [9], 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 [10]:
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 [10]:
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”.
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As we concluded previously, as Reuters reports [11], 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.
