Trim the hedge funds

Date: Tuesday, March 17, 2009
Author: Andrew Hill, FT.com

"We've got to take - a little bit - the glitz away," said Arki Busson, the one hedge fund investor that the gossip columns have heard of. He was referring to a charity fundraiser, which, even in its deglitzed form, sounds a lot more fun than hedge fund managers' day job right now. The market and the Madoff scandal have hammered hedge funds. Those running them would hardly be sentient if they were not rethinking their industry's future.

For once, investors have some negotiating power. They should exert it in three ways. First, fees. After the hedge funds' worst year ever, the usual 2 and 20 per cent combination of management and performance fees will no longer wash. Apart from cutting both, there are more concessions available to investors. They could take a leaf out of bank investors' books and push for clawbacks. Investors in funds pursuing harder to value, longer term strategies should suggest fees be paid out of realised profits, rather like private equity, and only after a hurdle rate has been cleared. But there is a second, more important consideration than fees in these more conservative times: liquidity.