Some of the biggest fund-of-fund investors expect hedge funds to lower management fees and introduce terms that let shareholders eventually claw back performance fees, The traditional take-it-or-leave-it stance in the hedge fund world is wobbling. Investors are demanding better terms from managers after hedge funds world-wide lost an average of 19 percent last year.
Institutions and affluent families withdrew record amounts from funds last year even as a number of funds imposed bans on redemptions at the end of 2008. With fund managers eager to retain clients in an environment where capital is scarce, investors have gained the upperhand.
"The power of the institutions is much greater than it was even six years ago," said Marcel Herbst, managing director of Zurich-based Harcourt Alternative Investments, which invests $4 billion in hedge funds. "Fees are negotiable." While superstar managers have no incentive to cut fees, a number of investors at last week's SkyBridge Capital hedge fund conference said the "two and twenty" standard - where funds charge management fees of 2 percent of assets plus 20 percent of investment profits - is slipping.
Management fees are inching closer to 1.5 percent. At the same time, investors want performance fees aligned with the interests of long-term shareholders through clawbacks. the ability for fund clients to reclaim fees awarded the previous year should gains evaporate.
The goal is to prevent managers from collecting big fees one year only to leave investors stuck with losses a year later. "The worst story you can hear is of principals, who made billions, and yet their clients lose money," said William Lawrence, chief executive of Meridiean Capital Partners. Hedge funds, after a decade of supercharged growth, on average lost about 19 percent last year.
"Clawbacks will happen. They should happen. It's only fair to the investor," said Brett Rubinson, partner of Veritable LP. The Abax Dymon Asia Macro Fund recently introduced clawback terms under which half of its 20 percent performance fees will be paid back if the fund loses money the next year. Investors upset about redemption bans are also pushing for better access to cash. SAC Capital Advisors LLC, the $14 billion hedge-fund firm run by legendary trader Steven Cohen, will begin allowing investors to withdraw money from its biggest fund every quarter, compared with a three-year lock-up.
Investors at the conference agreed the market will pay for top performance. SAC, for example, will continue to charge 3 percent management fees 50 percent performance fees. "It's not just fees. It's how they are consistent with locking up capital," said Clive Peggram, chief executive of FRM Capital Advisors, one of the world's largest fund-of-funds. "If you do a good job, we will pay."
Merdian's Lawrence also took issue with fund managers that are trying to reset high watermarks after their funds lost ground last year. Managers do not earn their performance fees until they surpass the previous high, but that was part of the original bargain. Still Lawrence concurred that the very best managers are not likely to put their funds on sale. "There are no fees too high," he jested, "just returns that are too low."