Hedge fund fees start to drop amid fierce competition

Date: Wednesday, October 20, 2010
Author: Shirley Won, The Globe and Mail

Hedge funds were once known for the fat fees they charged investors, but they are trimming those charges amid growing competition for clients.

When Connor Clark & Lunn Financial Group recently rolled out its first hedge fund for individual investors, it didn’t apply the typical hedge fund structure of a 2-per-cent management fee plus 20-per-cent of profits above a specified benchmark. Instead, it is only billing a 2.5-per-cent fee on the main version of its small-cap market neutral fund.

“This is not a teaser rate for us,” said Tim Elliott, head of managed assets at the Toronto-based investment firm. “We felt that a flat, straightforward fee with full transparency was the way to go.”

Other hedge fund firms are also starting to reduce fees to woo new investors and retain existing ones. The move is a response to fierce competition from both peers as well as from exchange-traded funds offering hedge fund-like strategies.

Hedge funds have become a tough sell because the industry “got a bit of black eye” after some funds lost a lot of money after taking levered bets to chase performance fees, Mr. Elliott said. “They had become mutual funds on steroids.”

Gary Ostoich, chairman of the Canadian chapter of the Alternative Investment Management Association, said the trend to lower or “creative fee arrangements” is more common among new managers trying to attract capital.

One of those new managers is Oakville, Ont.-based Acorn Global Investments Inc. When it opened for business last year, it eliminated the performance fee for investors willing to put money into its first hedge fund, Acorn Diversified Trust, by its launch in July, although the firm does charge clients a 2.5-per-cent management fee.

Some hedge funds that suffered major losses in 2008 are providing investors with temporary relief on fees. Goodwood Inc. of Toronto is waiving its 20-per-cent performance fees until its funds reach their so-called “high water mark” – the highest point the fund had previously attained. It’s doing so even though the firm is permitted to reset the high water mark every two years, and could have done so in 2009.

Front Street Capital Corp. also waived performance fees last year on two hedge funds because it felt it was the right thing to do in the wake of losses in 2008. But it plans to restore the fee this year even though these funds, which have rebounded strongly, have not yet reached their high water mark.

Just Ask

James Wanstall, chief executive officer of Blumont Capital Corp., has noticed more investors asking for lower fees. “Nobody used to ask three years ago.”

For clients wanting lower fees, Blumont already has one hedge fund that has fit that description since 1997. Its Blumont Hirsch Performance Fund run by veteran manager Veronika Hirsch has no management fee. The fund charges a performance fee of 20 per cent above a high water mark. But because it’s still below its high water mark it hasn’t charged a performance fee since 2007.

One factor driving down fees is the growing popularity of ETFs, Mr. Wanstall added. Some U.S. ETF providers have begun offering funds that now mimic hedge fund strategies. IndexIQ, for instance, runs IQ Hedge Macro Tracker ETF and IQ Hedge Multi-Strategy Tracker ETF, each of which charges an annual fee of about 1 per cent.