FSA may look at hedge fund fees

Date: Wednesday, February 11, 2009
Author: Laurence Fletcher, Reuters.com

Britain's financial watchdog may turn its attention to hedge funds' lucrative performance fees once it has investigated bankers' bonuses, accountancy firm PricewaterhouseCoopers said.

The Financial Services Authority and other international regulators could look at ways of linking stiff hedge fund fees more closely to underlying investments, Robert Mellor, UK financial services tax leader, said in an interview on Monday.

"The FSA is saying it's asking questions about the reward-risk link," he told Reuters.

"Our understanding is that once they get through the banks they'll go through asset managers and apply similar proposals."

On Monday, the FSA said a government-commissioned report it is set to deliver next month will look at whether some banking bonus packages "tend to produce an unnecessarily short-term focus".

That criticism comes as UK lawmakers quizzed four ousted bankers on Tuesday over their mistakes that lead some of them teetering on the brink of collapse.

An FSA spokeswoman said its comments on Monday on bonuses were "a message for the industry as a whole", although she declined to comment on whether or not the watchdog was looking specifically at hedge fund fees.

PwC said the FSA, which regulates hedge fund managers but not hedge funds, could urge hedge funds to adopt a model that is more similar to the one used in private equity and less short-termist.

The outcome could be that hedge funds holding illiquid assets where pricing is difficult do not receive performance fees until assets are sold.

More liquid strategies such as equity long/short, meanwhile, could charge lower annual fees as their running costs are lower, although performance fees could remain intact.

"With hedge fund managers the bulk of rewards are linked to net asset value movements that are unrealised. Private equity waits till the cash is in hand. It may be they go to a private equity model where fees are earned when investments are realised," Mellor said.

Mellor said moves by Britain, where the vast majority of Europe's hedge funds are based, and other international regulators could come after a report by IOSCO (the International Organization of Securities Commissions) to the Group of Twenty (G20) nations, which meets in London in April.