Hedge fund fees under pressure

Date: Monday, March 18, 2013
Author: Mark Smith, Financial Standard

Hedge funds globally have been forced to lower their fees as returns have failed to meet investors' expectations, says PIMCO executive vice president Ryan Korinke.

Hedge fund fees tend to be the most expensive of all active managed options available to investors because they typically promise higher returns, use more sophisticated techniques and often invest in more expensive, niche areas.

However, disappointing returns through 2010 and 2011, coupled with on-going industry pressure on fees has seen institutional investors across the globe review their hedge fund exposures.

Korinke says that funds-of-hedge funds, which have an extra layer of fees, have gone from representing around half the hedge fund market to around a third.

"There's an awful lot of pressure on fees at the moment and chief investment officers at superannuation funds are at the same time becoming more sophisticated," explained the portfolio manager.

"With returns coming down fees need to follow. We believe a fair fee is between 20%-30% of investment performance. That tends to be below the industry average."

He adds that in the unusual fee environment some fund managers are becoming more creative about the way they charge for their services and are offering a lower fee in exchange for a promise of a longer relationship with institutions.

There are already signs that the approach is working. Hedge funds have fared much better in recent times with net inflows of around $33 billion in 2012, about $10 billion more than in the previous year.

Korinke explains that one of the most exciting opportunities that PIMCO is exploiting lies in taking advantage of value opportunities presented by liquidity scarcity in the market.

While quantitative easing has helped to wash the market with extra capital, Korinke says that a tougher regulatory environment has seen banks step away from their day-to-day market activities.

"Risk premiums at the five major US banks have fallen some 55%. We're looking at a lot of trades that used to be made by the bank property desks. There has been a lot of price appreciation in the US housing market but not in underlying debt assets."