With most hedge funds substantially underperforming the major stock market indices year after year since the 2008 financial crisis, it is only natural for hedge fund investors to expect some concession on the fees they pay to hedge funds. However, despite reports of some hedge funds offering to lower asset management fees, it appears that there are a lot of hedge fund investors who feel like they are paying too much for too little with their hedge fund investments. Bloomberg is quoting a large hedge fund investor as saying that 90 percent of hedge fund managers are overpaid relative to their true talent.
Unigestion Holding SA
Unigestion is a large hedge fund investor. The Switzerland-based asset management firm has approximately $16 billion in assets and invests $2 billion of them in about 60 hedge funds. Nicolas Rousselet, who is the head of hedge fund investments at Unigestion says nine out of 10 hedge fund managers are overpaid. He adds that management fees at hedge funds don’t reflect lower interest rates and fund returns.
Hedge funds typically charge 2 percent of assets as management fees irrespective of whether a fund makes or loses money in a financial year. During years of positive returns, hedge funds pocket 20 percent of the profit. For a large hedge fund investor such as Unigestion which has $2 billion in hedge funds, a 2 percent management fee would equate to payout of $40 million every year.
Explaining his frustration with the current fee structure Rousselet says, “The philosophy of the hedge-fund industry, as it should be, is to remunerate true talent. Fund managers should be remunerated when they perform. They should not be remunerated for doing nothing.” Rousselet adds that he prefers a different structure in which the hedge fund industry should either abandon the management fee or combine it with a hurdle rate that must be achieved before collecting incentive fees.
Investor Dissatisfaction With Fees Common
Unigestion invests in 60 hedge funds which gives a lot of credibility to its view that most hedge fund managers are paid more than they deserve. Such dissatisfaction has been felt among other large long term hedge fund investors also. The largest US public pension fund, the California Public Employees’ Retirement System or Calpers is a well-known example of a firm disappointed with their hedge fund investments. It decided to make a significant cut of about 40 percent to its hedge fund allocation this year after weaker than anticipated returns on its hedge fund investments over several years forced a review of its costs associated with investing in hedge funds.
There are many portfolio advisers who share Unigestion’s view. Simon Lack, founder and portfolio manager of investment firm SL Advisors, says that across the hedge fund industry a lot of funds charge fees they don’t deserve. According to Michael Smith, who is the managing director at Global Endowment Management LP, most hedge funds aren’t worth paying 2 percent management fees and 20 percent performance fees.
Relevance to Job Market
This latest example of investor frustration with high fees adds to the thesis that hedge funds no longer enjoy the kind of clout they once had with investors. Even the continued increase in hedge fund assets is a result of a handful of large hedge funds capturing most of the money. With more and more hedge fund investors pressuring for changes to the traditional 2 and 20 fee structure, the net result is likely to be lower operating capital for many hedge funds. This will likely have a negative impact on the job market especially since many hedge funds are finding it difficult to meet targeted returns in the current market.