fundtruffle

Hedge fund managers negotiate on fees, to a point

David Stevenson, 20/09/2019

Hedge funds have for years been associated with, for some, the infamous '2 and 20' fee model. This is a 2 percent management fee and a 20 percent performance fee.

This fee structure had become the target of investors and politicians alike, with the former deciding to withdraw large amounts of their cash from the asset class. The California Pubic Employees' Retirement System (CALPERS) famously exited the strategies in 2014. However, new research from eVestment suggest that hedge fund managers are willing to negotiate on fees, although this seems to be mainly focused on the management fee as opposed to ultra lucrative (and difficult to achieve) performance fee.

Of the hedge funds covered in the report, 38.8 percent of them negotiated their management fees compared to only 11.3 percent of managers who were willing to negotiate their performance fees. 

The size of the investors' commitment was also a key influencer on how much wiggle room a manager would give on fees. The average commitment amount with discounted fees was over twice as large than that of commitments without any change from their stated fees. One hundred and nineteen million dollars was the average commitment size with a management fee discount and $133 million was the average commitment size with a performance fee reduction.

This is obviously megamoney and for those investors only able to scratch together a measly $52 million there was no change in management fee and for investors raising a paltry $55 million there would be no re-examination of performance fees.

Of course, direct access to this asset class is for large institutional investors so while these sums are big there was once a large appetite for the various hedge fund strategies. Within these strategies, the fee model can differ quite significantly as well. For instance, managed futures funds offered the lowest negotiated fees for public plans among direct hedge fund strategies, charging an average 0.7 percent in management and 16.4 percent in performance fees. 

At the other end of the scale, the '2 and 20' model holds true, such as algorithmic frontier markets-focused funds. While these funds aren't retail, some hedge fund strategies are available in a UCITS framework. Schroders GAIA range has a Paulson Merger Arbitrage fund, however, the investor protections offered by UCITS are seen by many to limit the extreme alpha generation these funds were created for (limiting positions in single stocks for instance).

The hedge fund fee debate will likely drag on although some of the 'dons' of the industry, for instance Bill Ackman, have evolved their strategies. He made his Pershing Square strategy available to the everyday investor by setting it up as a closed-ended fund. While it had a hard time when it launched on Amsterdam's Euronext exchange, trading at steep discounts, recently his stock picks have paid off as reflected by the share price performance of LSE listed Pershing Square Holdings.

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