Investors Searching for Funds with Competitive Fee Structures
Institutional Investors are beginning to challenge hedge funds’ fees due to managers’ mediocre performance in 2008. Prior to 2008, investors were happy to pay these fees as long as managers outperformed the S&P 500, their peers, or other benchmarks. Investors did not eliminate managers from consideration because of high management and performance fees. Rather, some investors believed you got what you paid for. Indeed.
Lower fees are on investors’ minds, and they know they have the upper hand in negotiations due to the large-scale redemptions that occurred in the aftermath of the credit crisis and hedge funds’ subpar 2008 performance. A large institutional consultant that works with foundations, endowments, and pensions plans in the United States mentioned to a BHA analysts that it is considering funds’ fees when making selections for its clients.
Hedge fund managers have noted the shifting sentiment. A recent New York Times article referenced a survey conducted by Barclay’s Capital1 that found approximately one-third of the managers surveyed were planning on changing their current fee structure. Many older, established funds with strong institutional backing will still be able to charge the traditional “2 and 20″ performance fees, while the top 50 firms will be able to change in excess of that. However, new fund managers and those without much experience or a proven track record will find it particularly difficult to charge the standard fees. This will make it tougher for new launches to gain traction.
Faced with the new realities of potentially lower fees and tougher competition, it is increasingly important for fund managers to offer terms that are attractive and competitive to investors.
1Kouwe, Zachary. “Hedge Funds Challenged Over Fees”. September 16, 2009. http://www.nytimes.com/2009/09/17/business/17FEES.html?_r=3