Hey, look, another hedge fund is throwing a sale!
Och-Ziff Capital Management Group is trimming the management fees on some of its main funds -- which range from 1.5 percent to 2.5 percent of assets annually -- by 25 basis points, as Sabrina Willmer and Saijel Kishan reported this week.
No business likes to reduce prices, whether it's selling alpha or alfalfa. But once one of the big operators does it, it's hard for everyone else to resist following suit. It was one thing when Tudor Investments trimmed fees last month to 2.25 percent of assets and 25 percent of profits, down from 2.75 percent and 27 percent. That's like Harry Winston cutting prices on diamonds -- the folks at Zales probably won't get too worried.
But Och-Ziff's fee cut is bound to reverberate more strongly among funds that haven't already succumbed to pressure to abandon the typical 2-and-20 fee structure. The averages show that many already have, with a slow but steady decline to 1.5 percent in management fees and 17.6 percent in performance fees, according to HFR.
At least those numbers can be rounded up to maintain the alliterative "2 and 20" shorthand, but it makes you wonder how long even that will last as pension funds, insurers and endowments sour on hedge funds amid a stretch of lackluster performance and cheaper, computer-driven alternatives. Steve Eisman of "The Big Short" fame, for example, is offering a 1.25 percent flat fee.
Look at the route New Jersey's pensions are taking with some of what will remain invested with hedge funds after they cut allocations in half. The state's investment council voted last month to invest up to $1 billion with BlackRock's fund-of-funds unit and target an average fee of 1 percent of assets and 10 percent of profits among the underlying hedge funds. It's also caught hurdle-rate fever, and is looking to require a minimum return before paying any performance charges. (This, tangentially, highlights an interesting role for fund-of-funds to play as collective fee bargainers as more investors go on strike.)
Investors in shares of Och-Ziff, one of the few hedge fund companies with publicly traded stock, took the fee-cut news in stride on Tuesday: The shares only dropped 1.5 percent. But further pain came on Thursday -- with more than 5 percent knocked off the stock in an otherwise flat market-- as Citigroup analysts weighed in.
The thing about slashing prices is that often cutting once is not enough, and that seems to be a worry when it comes to Och-Ziff. In Citigroup's assessment, the firm is on a slippery slope and could be in the "early stage of what may be sharp price cuts" in management fees.
Och-Ziff is certainly not alone on that slope, and it appears to be getting more slippery by the day.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
To contact the author of this story:
Michael P. Regan in New York at firstname.lastname@example.org
To contact the editor responsible for this story:
Daniel Niemi at email@example.com