Sep 12, 2014

    Managers of hedgies should 'earn their dues'

    NINE out of 10 hedge fund managers are overpaid as management fees do not reflect declining interest rates and fund returns, according to Unigestion Holding, which invests US$2 billion (S$2.5 billion) in hedge funds.

    The fees, which still make up as much as 2 per cent of a fund's assets, represent a disproportionately high share of the total remuneration unrelated to performance, said Nicolas Rousselet, head of hedge funds at Unigestion.

    To align managers' pay more with performance, the fund industry should either abandon management fees or combine them with a hurdle rate that one must achieve before collecting incentive fees, he said.

    "The philosophy of the hedge fund industry, as it should be, is to remunerate true talent," Mr Rousselet said in a telephone interview on Tuesday.

    "Fund managers should be remunerated when they perform. They should not be remunerated for doing nothing."

    Fees are coming down amid efforts to win mandates in an industry that traditionally charges about 20 per cent on performance and 2 per cent on the total assets.

    Investors paid an average 1.69 per cent last year, with the share of those who paid 1.5 per cent or more at 79 per cent, almost unchanged from 2012, according to a Deutsche Bank survey published in February.

    Global hedge funds returned 8.6 per cent last year and 6.9 per cent in 2012, compared with 10 per cent to 21 per cent in nine of the 11 years through 2010, according to Singapore-based data provider Eurekahedge.

    BlueCrest Capital Unigestion, based in Geneva, manages US$16 billion, of which US$2 billion is invested in about 60 hedge funds through its funds of hedge funds, said Mr Rousselet.

    Among hedge funds that have taken steps recently to trim what they charge was BlueCrest Capital Management, which said earlier this month that it cut management fees on its US$8.2 billion computer-driven hedge funds to 1.5 per cent from 2 per cent after assets tumbled in the past year.

    "In a low-rate, low-growth environment, it is far more difficult to justify high management fees," said Keith Pogson, a Hong Kong-based senior partner for financial services at Ernst & Young Global.

    "Hedge fund managers should work harder to justify the fees that they earn."

    Ninety-four per cent of Unigestion's assets come from about 250 institutional clients and 6 per cent from high net worth families, according to the firm's website.

    Unigestion's head of marketing, Jean-Francois Hirschel, declined to elaborate how much the firm charges its clients for selecting hedge funds. He said that the firm's share is about 10 per cent of the clients' total expense.

    "In general, fees have come down over recent years," said Celia Choh, Singapore-based head of fund services for Asia at Wells Fargo Global Fund Services. In Asia, management fees are now typically between 1 per cent and 1.5 per cent for early investors, she said.

    Fee negotiations "continue to become a more accepted practice for investors and managers globally", according to the Deutsche Bank survey.

    Seventy-four per cent of respondents said they negotiate fees, up from 51 per cent two years earlier.

    "We are negotiating with hedge fund managers," Mr Rousselet said, adding that he doesn't see management fees trending down. "But if you buy a top manager, the bargaining power is not in your hands."