Funds slash fees to pull in cash |
Date: Monday, December 1, 2008
Author: Sophia Grene, Financial Times
As more and more investors ask to withdraw money from funds of hedge funds, many managers face a difficulty not directly related to performance. Selling the more liquid parts of the portfolio to pay the departing investors their due might hurt the loyal clients who are not running scared. They would be left with a very different portfolio than they bought into.
So to pull in new money that would allow the fund of funds to manage liquidity better, some funds are cutting management fees, forgoing performance fees or otherwise lowering the cost.
“A lot of hedge fund managers are going to be working for nothing next year,” said Norval Loftus, senior investment manager at Ansbacher, speaking at a conference on alternative investments in London.
In October, $40bn (£26bn, €31bn) was taken out of hedge funds, according to figures from Hedge Fund Research. This is more than the total for the previous three months, while 2008 is likely to be the first year since 1994 when hedge funds globally saw more money taken out than put in.
In an effort to manage liquidity within the portfolio, some funds of hedge fund managers have created sidepockets, legally separate entities in which they put the illiquid element of a portfolio. A sidepocket usually has restricted redemption rules, so the assets can simply sit there until the markets recover sufficiently to make it possible to price them accurately.
“Others manage liquidity as well as they can and offer lower fees” to new investors, said Alexandre Pigault, head of alternative assets research at Kleinwort Benson. “For example, [investors buying by the end of January] could enter a fund with a lower management charge and no performance fee until it reaches the level of June 2008.”
Funds of hedge funds are cutting fees to clients in a number of ways. Dropping the annual management charge to 75 or even 50 basis points from 100 is a common start, but lowering or eliminating performance fees is frequently part of the deal.
As even hedge funds with robust performance see crippling redemptions, the idea of “sticky money”, not likely to be withdrawn at short notice, becomes attractive.
It is also becoming hard to get. When asked if he was putting client money into cut-price funds of funds, Mr Pigault said: “None of our clients will be foolish enough to put money into funds of funds at the moment.”
The underlying hedge funds are also coming under pressure to cut, or at least negotiate on, fees. “The two and 20 has been under threat for a long time,” said John McCann, managing director of Trinity Fund Administrators, referring to the traditional hedge fund fee structure with a 2 per cent annual management fee and a 20 per cent performance fee.
“There are now two tiers of hedge funds. The established ones charge two and 20 and that’s settled. But now there are newer ones where everything is on the table for negotiation, including fees.”
Raymond O’Neill, a founding member of Kinetic Partners, said he had seen one fund launch with no performance fee at all, contrary to standard hedge fund practice. He expects hedge fund fee restructuring to continue, even if it has not achieved its immediate objective of attracting fresh investment.
“There hasn’t been a flood of new money because of these creative fee structures, but they’re the beginning of the shape of things to come.”
Stephen Oxley, managing director of fund of hedge funds Paamco Europe, agreed one of the consequences of current difficulties would be a change in the way fees are set. “Institutional investors are going to use their power to influence the whole deal,” he said. “Fees are a part of that.” He suggested large investors might in future also be able to negotiate the liquidity terms.