Posts tagged as:


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.

{ Comments on this entry are closed }

Over the past several years, since the height of the financial crisis, the financial industry faced increasing criticism regarding executive compensation. Around the world, taxpayers saw financial institutions being bailed out with public money, while bankers in general were forced to sacrifice very little. While there were some short term reductions in bonuses and incentives during the darkest days of the recession, it seems as though overall such payments are increasing again.

In some countries, such as the United Kingdom, politicians have been successful in enacting legislation capping the bonuses of bankers to 100 percent of their annual salary, or up to 200 percent if specifically approved by shareholders. Many are calling for expansion of this legislation into the hedge fund and private equity industries, but others are suggesting that may not be necessary. Increasingly, investors are the ones calling for change, as they see an increasing gap between the returns provided to their account, and how much their investment managers are making.

Man Group to Cap Bonuses as Performance Falls Short

As reported by Laurence Fletcher of Reuters, hedge fund giant Man Group will be one of the first to surrender to investor demands and radically reform executive compensation. According to its 2012 annual report, short-term annual cash bonuses will be limited to 250 percent of salary for its executive directors, following discussions with shareholders. Further, no bonuses would be paid out to top executives in 2012 at all.

This reflects the direction of new chief executive officer Emmanuel Roman, who is desperate to turn around the beleaguered firm. Substantial customer outflows have impacted the firm in every quarter for the past four years – other than a brief respite in the first half of 2011. Worse, for shareholders in the firm, share prices have fallen by two thirds over the last two years.

Increasingly, firms are being called upon to implement quantifiable financial metrics in order to more rigorously measure employee and executive success. Man has implemented change in this area as well, moving 80 percent of its long-term deferred bonus incentives into a structure that reflects tangible financial measures. Some have criticized using hard numbers as the basis of compensation due to the risk – it may incent executives to manipulate financial results.  However, Man has proactively implemented policy that would see executives forfeit any incentive compensation if there was any misconduct or misstatement of financial figures.

Hedge Fund Incentives will be Increasingly Structured Moving Forward

The changes at the Man Group are far from unique in the hedge fund industry. While those working for hedge funds will certainly remain in the top tiers of compensation, their incentive pay will certainly be more closely linked to shareholder and investor returns moving forward. It has simply become unconscionable for executives and employees to be seen walking away with huge pay packets, while on the other hand, funds post negative returns for their investors and see fee revenue fall for their shareholders. These changes are not only important to regain the confidence of investors, but the public at large.

{ Comments on this entry are closed }

Hedge Fund Career Opportunity Regulatory Compliance

June 11, 2012

Globally, regulators have been working towards a G20 agenda of introducing new registration and reporting rules for hedge fund managers. Both the Alternative Investment Fund Managers Directive (AIFMD) in the European Union and the Dodd-Frank Wall Street Reform and Consumer Protection Act in the United States are seeking to enhance the flow of information from […]

Read the full article →

2012 Hedge Fund Compensation Report

January 10, 2012

SAN DIEGO, CA, January 10, 2012 — The 2012 Hedge Fund Compensation Report reveals that hedge fund managers anticipated an increase in base salary but a shortfall in year-end bonuses. The average reported cash compensation for 2011 was $311,000, just slightly higher than last year’s compensation. The annual industry report is based on data collected […]

Read the full article →

Participate in the Hedge Fund Compensation Survey

November 7, 2011

The fifth annual Hedge Fund Compensation Survey is live and is collecting data on hedge fund pay benchmarks. The online survey can be completed quickly and eligible participants who complete the survey receive the final Hedge Fund Compensation Report (a $297 value) free of charge. Hedge fund professionals can participate in the survey by visiting […]

Read the full article →

Deferred Comp Coming to Hedge Funds Jobs?

November 23, 2009

In a move mirroring their cousins in the investment banking world, hedge funds are entertaining the idea of deferring bonus payments to take place over longer periods of time. A greater portion of the typical hedge fund employee’s compensation – as much as 50 percent – may be paid out over longer periods of time, […]

Read the full article →

Hedge Fund Compensation Edges Up

November 16, 2009

After taking a nosedive in 2008, hedge fund compensation at U.S. funds has begun to inch up again, according to a new survey from Glocap Search and HedgeWorld. Total compensation, including salaries and bonuses, moved up by 7 percent in 2009 for middle- and bottom-performing funds, and by 2 percent at top performing funds. This […]

Read the full article →
Real Time Web Analytics