Size Doesn’t Matter When Charging Fees

Date: Friday, December 1, 2006
Author: Dailyii.com

Bigger mandates awarded to hedge funds do not necessarily result in a lower fee scale, according to research by Mercer Investment Consulting. The study found did find one exception, however: international currency overlay, where the median fee charged for a $25 million mandate was 0.30%, compared with just 0.19% for one of $250 million. While size may not matter, the choice of manager or strategy could make a difference. According to the report, fund of funds with mandates of $25 million to $200 million and that outperformed cash by 4 percentage points, charged a median 1.3%, while investors in multi-strategy single managers paid a median of 1.75%. In contrast, fee scales for traditional active fixed income, also included in the Mercer research, have remained stable since 2004, and are marketed lower than those of alternatives, held around 0.25%, with higher rates for high-yield bonds and credit-driven products and lower fees for government products. Fee scales also varied according to the potential performance of a strategy, such as global small cap equity and emerging market equity, which are richer sources of alpha. Given that we are in an environment of lower expected returns, albeit one with a dash of alpha, investment managers will find it hard to justify above-average fees unless they have demonstrable competitive advantages, according to Mercer partner Divyesh Hindocha.