Hedge funds should beware pressure on fees-Lipper

LONDON, Dec 4 (Thomson IM) - Hedge funds should be wary of being pressured into cutting fees because of poor performance numbers during the financial crisis, a director at fund research company Lipper FMI said on Thursday.

Speaking at a briefing on trends for the fund management industry, director of fiduciary operations Ed Moisson said the industry was seeing much discussion around a potential overhaul of the standard '2 and 20' structure.

Hedge funds have traditionally charged a 2 percent management fee and a 20 percent performance fee on investments in their funds.

That system has been called into question before, but the negative returns posted in the industry during the financial crisis have escalated the debate.

According to Credit Suisse/Tremont's index of hedge funds, the industry saw overall negative returns of more than 10 percent in the third quarter.

Moisson warned against hedge funds giving in to investor pressure and lowering fees as that would bring about a 'fundamental change' that would prove counter-productive.

'If that concept is put under pressure, then hedge funds will have some serious problems longer term because in principle they are selling themselves on the idea that they are delivering superior returns and you pay more for the privelege.'

'If they say you don't have to pay more for the privilege then obviously that will be a concern,' he said.

Hedge fund managers, however, may find it difficult to resist: 'If there is sufficient pressure for fees to come down, they will do,' he said.

Moisson also said the problems faced by hedge fund managers now struggling to hit the return levels -- or high water marks -- at which they start to earn performance fees and which have steadily risen while the industry performed strongly.

'Even with a recovery in the markets, the problem for hedge funds on the revenue side is going to be longer lasting in order for them to catch up with the high water marks they were setting last year,' he said.

Hedge funds are already feeling the squeeze as cash-strapped investors are forced to pull their money out of the asset class often regardless of whether a particular fund has underperformed.

Lipper and Lipper FMI are wholly-owned units of Thomson Reuters.