Comments on: Hurdle Rates: Institutions Need To Take the First Step http://allaboutalpha.com/blog/2007/02/15/hurdle-rates-institutions-need-to-take-the-first-step/ Hedge funds, portable alpha, 130/30 and alpha-centric investing Thu, 18 Mar 2010 13:53:53 +0000 http://wordpress.org/?v=abc hourly 1 By: MIT Quant http://allaboutalpha.com/blog/2007/02/15/hurdle-rates-institutions-need-to-take-the-first-step/comment-page-1/#comment-663 MIT Quant Fri, 16 Feb 2007 17:39:55 +0000 http://allaboutalpha.com/blog/2007/02/15/hurdle-rates-institutions-need-to-take-the-first-step/#comment-663 Why do hedge funds seem to think that it is their God-given right to get 2% + 20% of performance over a small hurdle such as LIBOR? An investment in an S&P 500 ETF will outperform LIBOR's 5.36% return about 63% of the time. And it will do that at minimal cost. If I were an institutional investor, I would think that a reasonable fee is 1%, plus performance fees above the equivalent risk-adjusted benchmark (with credit towards the 1% fee). I would also be comfortable with higher performance fees as well. For example, if a hedge fund expects to have risk comparable to the S&P 500, then I would consider providing a 40% performance fee for performance above the S&P 500. True rock stars with long histories of success (Renassiance) can charge more, but for the vast majority that haven't provided stunning returns for the past couple of years, I don't see how the 2/20 fees are justified. Why do hedge funds seem to think that it is their God-given right to get 2% + 20% of performance over a small hurdle such as LIBOR?

An investment in an S&P 500 ETF will outperform LIBOR’s 5.36% return about 63% of the time. And it will do that at minimal cost.

If I were an institutional investor, I would think that a reasonable fee is 1%, plus performance fees above the equivalent risk-adjusted benchmark (with credit towards the 1% fee). I would also be comfortable with higher performance fees as well. For example, if a hedge fund expects to have risk comparable to the S&P 500, then I would consider providing a 40% performance fee for performance above the S&P 500.

True rock stars with long histories of success (Renassiance) can charge more, but for the vast majority that haven’t provided stunning returns for the past couple of years, I don’t see how the 2/20 fees are justified.

]]>