“1.75 and 21.93″: The new, new, new fee structure?
Nov 10th, 2009 | Filed under: Investment Management Fees, Today's Post
Like Democrat versus Republican, Communism versus Capitalism or Yankees versus Phillies, discussion and debate over fees, their justification and their pending demise is perennial and never-ending. With each market downturn and never-again wave of investor revolt, the banter over whether alternatives managers can and should be exorbitantly charging for their services inevitably heats up.
Certainly AllAboutAlpha.com is just as guilty when it comes to focusing on and feeding the fee frenzy. Only a few weeks ago we published this post about the yet-again demise of 2 and 20 in light of the new era of reduced returns – and reduced interest – in hedge funds.
So it caught our attention when Tabb Group published a report last week noting that while they too expect management and performance fees to steadily decline over the next couple of years, that according to their poll of hedge fund managers 1.75 and 21.93 are actually the new 2 and 20.
“Many wouldn’t be surprised to know that ‘2 and 20’ is still alive and well,” Matt Simon, TABB research analyst and author of the new study, “US Hedge Funds 2009: Fees, Redemptions and Managed Accounts,” noted in a statement accompanying the release of his report. “When weighted by assets under management, the reality is ‘1.75% and 21.93%’.” More…
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One interesting thing for fees structures would be for funds to offer a discount based on a lock-up with a pre-determined early exit penalty. For example a 1% fee against a 6 year lock-up etc.
The risk of course is that the investor market may see this as signaling fund weakness, but it would get the “how much do you trust me and my process.” argument out on the table.
This would serve both the fund and the investor in the long run as it would make it less likely the investor would selll the lows in the fund, would provide more stability operationally for the fund and would better the investors returns over the long run.
Interesting research and although I have not seen a full copy of the report the exerts I have seen quoted in press articles does seem to make sense with my experiences. I chaired a conference organised by The Hedge Fund Journal in London last week on managed accounts and what role they can play moving forward. A number of the discussions certainly supported the findings of the report, namely:
1) Investor preferences placing higher weight on transparency, liquidity, control and governance
2) Assets flowing onto managed accounts are likely to increase significantly over the next year or two