Hedge funds on a refund policy

Date: Friday, July 3, 2009
Author: Michael Hobbs, Financial Standard

Hedge fund investors are developing new fee structures around long-term performance - putting in place a "refund" clause if the hedge manager underperforms.

The latest State Street Vision report on the sector found hedge fund investors are developing fee structures around long-term performance and putting in place reimbursement policies clauses.

The report cited the $210 billion California Public Employees Retirement System (CalPERS) which requested 26 hedge funds to adopt a fee structure that included the ability to claw back fees in when managers post poor returns and payment of fees spread out over seven years.

"Hedge fund managers are expected to exhibit the same sound approach to business management they expect from the companies in which they invest," said Kurt Silberstein, senior portfolio manager at CalPERS Global Equity in March this year.

The report also cited the Utah Retirement Systems which called for hedge funds to cut management fees as their holdings increased. The fund also requested greater transparency of holdings and a ‘scorecard' of good and bad investment calls.

At the same time, high performing managers will reap the rewards as the hedge fund market shrinks, those left will be able to justify larger fees, the report found.

Fee structures is just one area where hedge fund investors will see significant changes, the State Street report said. The report also outlined that ‘post-crisis' hedge funds will be more transparent, provide more documentation and governance records and offer more investment choice.