Hedge Funds Cutting Fees

I recall in the mid 1980s when people who should have known better (McKinsey consultants and analysts covering the banking industry) were adamant that banks would never cut their fees or interest rate charges (19.8%) on credit cards.

I remember thinking of the confidence over credit card pricing every time experts insisted that hedge funds (save maybe newbies) would never, never cut their famed “2 and 20” fees (2% annual fees plus 20% of the gains). Talent, after all, would always be able to command a premium.

Those charges are proving to be less than sacrosanct after all. There had been reports earlier of big established investors winning concessions, but price cutting is becoming more widespread. From the Financial Times:

The hedge fund industry, infamous for imposing high fees, is finally beginning to cut these charges amid heavy outflows and investor complaints after a year of losses.

Three hedge funds contacted by the Financial Times admitted to cutting their fees for new investors, usually by lowering management fees by half a percentage point to between 1 per cent and 1.5 per cent, and performance fees from 20 per cent to 10 per cent…..what makes the current trend striking is that the number of special deals is proliferating fast….

Guy Haselmann, a principal at Gregoire Capital, a hedge fund that invests in fund of funds, said: “Fees are coming down, and they will continue to come down . . . generally the funds aren’t kicking and screaming too badly, they want more permanent capital.”

One hedge fund manager said: “It used to be that we gave our standard rate (2 per cent and 20 per cent performance fee) most of the time. Now, new investors paying that would be in the minority.”

Another manager who recently opened a new fund said: “We have cut our fees for our latest fund, though it would be catastrophic if that got out.”

Pension funds, under pressure to regain losses, are also making a push for lower fees. A few months ago, Calpers wrote to the 26 funds managing its $6bn in hedge funds with a list of demands, one of which was a fee cut in the form of a “clawback” on fees if the fund did well after a money-losing year.


Originally published at Naked Capitalism and reproduced here with the author’s permission

2 Responses to "Hedge Funds Cutting Fees"

  1. Guest 2   May 11, 2009 at 3:36 pm

    First…..deflation abounds….

  2. Realist   May 15, 2009 at 6:33 am

    Based on recent performance, the hedge fund “talent” mostly had talent when the bull was running, the carry trade trade worked, and commodities were through the roof thanks to ethanol and oil. In other words, the talent was not (is not) talent at all, just part of the herd and largely dependent on luck. I would not give you a dime for it.