Earlier this week, The Telegraph reported that pension funds were fed up with “high fees” and planned to “tell hedge funds to drop fees.”
Fees are never far from the top of the list of institutional investors’ concerns about asset managers (of all stripes). The Telegraph’s claim was backed up by an interesting duo of surveys conducted by consultancy bfinance. Our reading of the results suggests that last year’s frustration over fees may actually be subsiding. Can we be on the verge of a detente between pensions and asset managers when it comes to fees? You decide…
Among several notable findings: investors have taken a renewed interest in active management. We’re guessing that investors may think the market is feeling “toppy” (technical term) and want off the 2009 beta (bullet-) train. When asked last winter whether recent market events would make them more passive or active, 28% said it would make them seek out more passive equity holdings while only 9% wanted to become more active (see chart).
Fast-forward one year and the situation has changed markedly. Now 23% believe they will favor more active strategies while only 19% believe they will become more passive (see chart). The same is true for fixed income strategies.
Even so, investors maintained that passive investing remains good value for the money – particular when compared to the most active of all strategies: hedge funds. The chart below was created with data from this chart.
It’s easy to conclude from this chart that investors don’t see good value for money in hedge funds and other alternatives. But you have to remember that over half of respondents had no exposure to 10 of the 14 asset classes examined.
We re-caste the data to show the opinions of only those who actually invest in each asset class and found that hedge funds were actually seen as a “good” or “very good” value for the money by the majority of those who invested in them. Then we compared these results with those reported by bfinance from last year’s survey. Here is the result:
In last year’s survey, a grand total of zero percent said passive hedge fund replication was a “good” or “very good” value for money. This year, that number is 4% of all respondents and a whopping 40% of those who actually invest in this type of asset.
Two caveats though. One is that the numbers are small for these niche assets, so you can’t extrapolate too much. The other is that you might expect those in a niche asset class to find them good value for money. Otherwise, why are they invested in them? (In the case of hedge fund replication, we suspect that lower fees were the rationale for investment in the first place.)
But this chart shows the percentage point change from last year to this year. And the trend is clearly toward more satisfaction with fees, not less – even over fees charged by hedge funds and private equity funds (although property and infrastructure managers may have some ‘splainin’ to do.)
Fund managers themselves seem to agree. When asked last winter by bfinance, 50% of single hedge fund managers felt that management fees would drop while 39% felt that performance would fall (see chart). This winter, only 38% of managers felt management fees were on their way down, while a tiny 16% thought performance fees would fall (we assume they meant performance fee terms, not absolute performance fee amounts). Actual fees reported by funds did drop marginally (see chart) but likely not enough to comfort investors that much. So it would appear that investors themselves have relaxed a little over the past year.
(By the way, anyone who thinks all single manager hedge funds always charge 2% should check out this chart again, showing that two thirds of funds surveyed would charge less than 150 bps in a “competitive tender environment” for institutional assets.)
There are a lot of interesting tidbits in this survey (e.g. managers’ views of the trade-off between fees and clock-ups). So it’s worth the look if you haven’t seen it already.