GLOBAL - Managers' fees in the alternatives sector have been condemned as unacceptable, with one pension fund accusing asset managers of creating a "cartel".
Andrew Chapman, pensions investment manager of the £2bn (US$4bn) John Lewis Pension Scheme, told Global Pensions: "In the newer, niche investment areas such as hedge funds and infrastructure, managers have started with a clean sheet so have been able to charge whatever they want.
"Hedge fund fees are outrageous, but they all charge the same and we have no alternative but to pay it. Really, what is their incentive to go lower, it's like they are running a cartel."
Dan Bergman, head of risk allocation, AP3, said the SEK225bn (US$36.4bn) Swedish fund looked for the lowest fees and would not pay high rates unless it judged the investment would generate enough alpha in excess of fees.
He said the higher the fee level, the more certain AP3 needed to be in its assessment of the manager's ability.
"We pay managers for their skill and ability," Bergman said. "If we thought we could recreate what they were doing for a better price, we would manage the mandate ourselves."
Watson Wyatt's research also found some pension funds had paid back in fees all the alpha a manager had created.
Andrew Baker, deputy CEO, Alternative Investment Management Association (AIMA), commented: "The hedge fund industry is a very competitive environment, with a wide range of products and related fee structures for investors with different appetites for risk and investment opportunities.
"If hedge fund managers felt there was any competitive advantage to be derived from discounting fees, they would be quick to react."
Jeff Schutes, US business leader, Mercer, concluded: "Some alternative managers are creating enough alpha to warrant these fees, while some pension funds have looked to passive strategies in other areas of their portfolio to offset higher fees charged for alpha."
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