Top investor slams hedge fund fees

Date: Sunday, February 18, 2007
Author: Louise Armitstead, Times Online

ONE of the world’s largest investors has slammed hedge funds for excessive charges in a move that could spark a reassessment of fees in the high-rolling sector.

Russell Read, chief investment officer of the $232 billion (£119 billion) California Public Employees’ Retirement System (Calpers), one of the world’s biggest pension funds, said many hedge funds were demanding high fees despite producing returns in line with traditional managers and even simple funds that track stock market indexes.

Read, who expressed his views at the Institutional Fund Management conference in Geneva, said: “We have no problem paying high performance fees for a manager’s selection, but we find taking on average market risk inherently unsatisfying.”

If Read decides to take a stand on hedge-fund fees it could have serious repercussions for the sector. Calpers, the largest American public pension fund, invests about $4.5 billion in hedge funds across the world. This amounts to about 2% of its assets under management and recently the fund said it planned to increase that proportion to 3% in the next three years.

But Read made it clear in Geneva that he had no intention of overpaying for his investments. “We can get average market risk very cheaply,” he said. “We hate paying a performance fee for something we can get very cheaply.” Calpers, based in Sacra-mento, California, paid $500m in fund management fees last year.

Read’s comments come at a time when many hedge-fund managers are raking in record pay.

According to accounts filed at Companies House last week, 10 partners at Sloane Robinson, the London-based fund, shared £207.9m in the 16 months to March 2006. The highest-paid among them was paid £58.6m.

Even so, these figures are still relatively small compared with the pay packets earned by hedge funds in America. The top 26 earned an average of $363m in 2005, according to a survey by Alpha magazine.

However, Calpers insisted that it is still supportive of paying high fees to managers who produce top performance and warned that radically altering the fee structures could be dangerous.

A spokesman said: “We don’t mind paying for performance. That’s a positive thing in general . . . If we changed the fee structures, we think we would lose the best managers. They would go to other investors. So we’re cautious about unilaterally trying to change them.”

Instead Read suggested that the fee system for hedge funds might eventually evolve to allow those who outperformed markets to get paid more than those who rode market returns.

High fees have not stopped investors from pouring a record $126.5 billion into hedge funds last year, according to Chicago-based Hedge Fund Research.

The average hedge fund rose 13% last year, trailing the 13.6% gain in the Standard & Poor’s 500 index and the 18% advance in the Morgan Stanley Capital International World index, according to Hedge Fund Research.

Pay is a sensitive topic for the notoriously opaque industry but typically hedge funds charge a flat fee of 2% of funds under management annually and 20% of a fund’s outperformance.

Many investors, both institutional and retail, achieve exposure to hedge funds through “funds of funds”. These vehicles provide exposure to a breadth of hedge fund styles, geographies and asset classes. Managers of these funds typically increase the underlying hedge-fund fees by 50%.