Capital One
Cheyne Capital News – Cio On How Alternative Funds Adapt As Fee Pressure Weighs
Private equity and hedge fund firms are battling to offer more flexible fee structures as they come under pressure from clients after many funds lost money in the credit crisis.
Institutional investors making big ticket investments have pushed for lower management fees, paid as a percentage of assets managed, and many are already getting them.
Some industry insiders, speaking at the Reuters Private Equity and Hedge Funds Summit this week, are surprised it took a crisis to force the changes with clients rarely moved to challenge fat fees in better times.
“It’s been a matter of permanent puzzlement that investors have taken little interest in fees (until now),” said Jon Moulton, founder of private equity firm Better Capital.
Things have changed since the crisis broke, with clients pushing for fee cuts, especially where access to their assets is not always immediate.
“Clients are reluctant to pay fees on unrealized returns of illiquid assets,” Chris Goekjian, CIO of private equity firm Cheyne Capital told the Summit in London.
“No one wants to pay fees on returns that ultimately may not be realized,” he said.
Hedge fund performance fees came under pressure during the financial crisis, when many funds failed to protect investors and restricted investors’ access to their money, saying withdrawals could harm other clients.
However, investors said managers who shared gains in good years should also share the pain in bad ones.
Cheyne Capital has addressed investors’ concerns by only levying performance fees on realized gains, said Goekjian.
CRISIS RESPONSE
Some managers have responded proactively to the financial crisis and the ensuing fee debates and others have come under pressure from their investors to lower fees.
“We cut our management fees by 20 percent… we were not making new investments at that time,” said Bob Long of listed private equity fund of funds Conversus (CONCA.AS).
“The fact that we were a leader in reducing fees has helped us,” Long said.
The typical structure of a 2 percent management fee and a 20 percent performance fee is gradually being eroded as more hedge fund and private equity managers adapt to investors’ demands.
“Some hedge fund managers are already being paid 1 and 15 when they manage institutional money and our expectation is that we will see more of this,” Andreas Utermann, Global Chief Investment Officer at Allianz Global Investors equities arm RCM, said at a separate briefing this week.
Some funds are already ahead of the pack but have little intention of breaking lower ground at present.
These include Toscafund, where fees of 1.5 percent for management and 15 percent on performance have always been among the lowest, said chief executive Martin Hughes.
Still, managers say there is little reason for the best funds to budge on performance fees as investors are still willing to pay for outperformers.
“There is not that much pressure on fees… if you make the returns,” said Oliver Dobbs, chief investment officer of hedge fund firm CQS.
About the Author
Cheyne Capital is an independent hedge fund manager.
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