GLOBAL - Research house Lipper is urging pension funds to follow the lead of CalPERS and Utah Retirement Systems in pushing hedge fund managers to explain and justify their fee structures.
The 2% management and 20% performance fees charged by hedge funds have long been contentious among many investors, particularly after funds posted a record 19% net loss in 2008 having made fees on over 10% gains in 2007, according to Hedge Fund Research.
In early 2009, CalPERS wrote to more than 30 managers requesting they improve their terms, including fees.Around the same time, Utah's pension fund pushed its managers for ‘claw-back' arrangements, allowing investors to recoup charges paid to funds that subsequently underperformed.
Ed Moisson, head of consulting at Lipper SMI, the unit which analyses the mutual fund market, said: "The move was begun during the financial crisis by pensions to justify fees charged by hedge funds. There is nothing unreasonable about that.
"Hedge funds have installed strong standards around transparency generally, and maybe that should be extended more fully to fees, as well."
Don Steinbrugge, managing member of US-based third party hedge fund marketer Agecroft Partners, said: "Many large pension funds are asking for special terms, and more and more hedge funds are trying to accommodate them."
Agecroft's Steinbrugge said "a vast majority of funds" have no hurdle to clear before collecting incentive-based fees, "however for a large enough investment, some funds would consider this".
He added some hedge funds already had share classes with lower fees in return for investors committing capital for longer.
Steinbrugge added: "Some funds do not collect either any, or a portion of, their performance fee for an extended period of time, which has they same effect as a clawback."
Moisson said the EU's forthcoming Alternative Investment Fund Managers directive had not tackled fees fully enough. As a result, Lipper set out 10 issues trustees should ask managers.
• What is the performance fee rate, and does this apply to total returns, or just net returns above a benchmark?
• Is there a fixed hurdle rate or other benchmark, above which performance fees can be collected?
• Is there a high water mark and what is its duration?
• Is there a ‘claw-back' mechanism?
• Is there an equalization system?
• How often is the performance fee crystallised for payment?
• Is there a cap on fees?
• Is there a penalty for underperformance?
• Is there a quid pro quo for lock-up arrangements, such as lower fees?
• Is there a redemption penalty, and what is the redemption notice period?
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