Nine out of 10 hedge-fund managers are overpaid as management fees don’t reflect declining interest rates and fund returns, according to Unigestion Holding SA, which invests $2 billion in hedge funds.
The fees, which still make up as much as 2 percent 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 the management fee or combine it 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,” Rousselet said in a telephone interview on Sept. 9. “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 percent on performance and 2 percent on the total assets. Investors paid an average 1.69 percent last year, with the share of those who paid 1.5 percent or more at 79 percent, almost unchanged from 2012, according to a Deutsche Bank AG survey published in February.
Global hedge funds returned 8.6 percent in 2013 and 6.9 percent in 2012, compared with 10 percent to 21 percent in nine of the 11 years through 2010, according to Singapore-based data provider Eurekahedge Pte.
Unigestion, based in Geneva, manages $16 billion, of which $2 billion is invested in about 60 hedge funds through its funds of hedge funds, said Rousselet.
Among hedge funds that have taken steps recently to trim what they charge was BlueCrest Capital Management LLP, which said earlier this month it cut management fees on its $8.2 billion computer-driven hedge funds to 1.5 percent from 2 percent 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 Ltd. “Hedge-fund managers should work harder to justify the fees that they earn.”
Ninety-four percent of Unigestion’s assets come from about 250 institutional clients and 6 percent 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 percent 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 percent and 1.5 percent 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 percent of respondents said they negotiate fees, up from 51 percent two years earlier.
“We are negotiating with hedge-fund managers,” 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.”