Hedge funds grab more in fees- Funds taking advantage of growing popularity

Date: Friday, October 8, 2004

"Hedge funds are taking advantage of their growing popularity by boosting fees and grabbing a bigger slice of the high returns that made them so attractive in the first place," writes Gregory Zuckerman in today's Wall Street Journal. "These private investment partnerships cater largely to institutions and wealthy people and invest in a range of instruments, from stocks and bonds to oil futures and derivatives. They have found many new fans in recent years among pension plans, charities, school endowments and individual investors, with funds under management doubling to about $870 billion from four years ago and the number of funds rising to about 5,900 funds today from 2,500 a decade ago." "Expensive propositions, hedge funds require an initial investment of at least $250,000, and the investor needs to have $1 million to $1.5 million of net worth. But with interest rates low, and the stock market still not cheap, some investors say hedge funds remain the best option, making up for their cost by their performance." " 'To gain access to elite investment talent, the price of admission is often steep' says Greg Brousseau, managing director at UBS, who co-manages about $5 billion in alternative investments. 'High fees can still prove reasonable in return for years of outsized returns.' " "Hedge funds have recorded annual gains of 10.7% since 1994, according to CSFB/Tremont, which tracks about 400 hedge funds. That tops the annual gains of 10.4% for the Standard & Poor's 500. And hedge-fund returns often move in a different direction from the overall market -- rising during the recent bear market for example -- helping diversify an investor's portfolio, often with less volatility." "Until a year or two ago, most charged annual fees of 1% of their assets under management, to cover the expense of running a fund, and took 20% of the gains each year as an "incentive" fee. But the bite from fees has been rising." "According to a survey of almost 800 hedge funds by Hennessee Group, a New York investment adviser, 41% of hedge funds now charge management fees topping 1%. The shift has been most pronounced among newer funds. Among 400 new stock and bond hedge funds reviewed by Hennessee in the past year, an average management fee of more than 1.5% was assessed." "A slew of the largest firms -- including Tudor Investment Corp. of Greenwich, Conn., Highbridge Capital Management of New York and D.E. Shaw & Co. of New York -- charge 2% to 4% of assets, or more than $100 million annually, for their big hedge funds."