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Hedge funds hold the line on fees

Date: Tuesday, August 4, 2009
Author: Deal.com

As the losses and shutdowns piled up for hedge funds throughout 2008, many thought that it was a sure bet that the industry would have to lower its fee structure to ride out the tidal wave of withdrawals. But apparently it was not to be.

The majority of hedge funds that survived steep losses have kept their 2% management fee and 20% of the profits fees intact.

Hedge funds have been so good at holding on to their compensation structure that a huge institution like California Public Employees' Retirement System had to deliver an ultimatum last week to hedge fund managers to get any movement on fees.

According to Bloomberg industry heavyweights like

Daniel Och's $20 billion Och-Ziff Capital Management Group LLC, Steven Cohen's $14 billion SAC Capital Advisors LP and Highbridge Capital Management LLC's $23 billion fund haven't reduced performance fees and are demanding a three-year lock-up in exchange for any cut in management fees.

Hedge-fund managers collected fees of about $55 billion in 2007, when returns averaged 10%, according to Hedge Fund Research. Fees shrank to about $25 billion last year. They will be about $45 billion in 2009, assuming returns and assets under management are constant for the rest of the year.

On the other hand the far-less-liquid private equity industry has seen movement on the fee structure as IRRs fall and tight credit markets sap the ability of buyout shops to do leveraged deals.

Unlike hedge funds whose fundraising has benefited greatly from 2009's run-up in equity markets, private equity firms lock up multimillion-dollar commitments for a decade. When LBO shops turned out big double-digit returns over the past five years, limited partners were willing to shell out to be part of the action, resulting in a number of megafunds ranging from $1 billion to as high as $20 billion. But now that the number of exits has shrunken and valuations are way down, LPs are beating on manager's doors for a reduction in the 2% management fee that has acted as as an industry benchmark. (Buyouts also typically take 20% of the profits when they sell portfolio companies as well.)

In July it came out that three of the largest limited partners in the world -- CalPERS; fund-of-funds AlpInvest Partners NV, Europe's largest backer of private equity; and HarbourVest Partners LLC -- were are all pressing for a reduction or end to the fee. - George White