Hedge Fund ‘Casino’ Fees Shunned by $19 Billion Pension Fundby
The British Broadcasting Corp.’s $19 billion pension trust is cutting allocations to hedge funds as it seeks to reduce spending on fees for money mangers.
“We’re not terribly enthusiastic about the idea of paying a manager two and twenty just to go to the casino on our behalf,” James Duberly, the BBC’s director of pension investments, said in an interview. Hedge funds traditionally charge a management fee that’s 2 percent of assets, plus 20 percent on any profit.
The hedge fund industry is shrinking in Europe amid rising regulatory compliance costs and declining capital inflows, with Warren Buffett, the billionaire chairman of Berkshire Hathaway Inc., among investors critical of fees charged by managers. Allocations to hedge funds by the BBC have almost halved since 2012 and are currently about 3 percent of total assets, Duberly said.
The annualized return of the state-controlled broadcaster’s pension fund has been 9.3 percent in the five years to March 31, according to its 2016 accounts, spurred by profits on government bonds as well as property, infrastructure and private equity assets. Still, it faces a 2 billion-pound ($2.5 billion) funding shortfall, according to its last actuarial valuation in 2013.
The focus of hedge fund investments is “evolving towards strategies that give exposure to a particular market, rather than ones that are just trading the equity market up and down,” Duberly said. Globally, macro funds gained 0.64 percent in October, according to preliminary estimates from the Eurekahedge Macro Hedge Fund Index. The returns are based on data provided by 15.2 percent of reporting firms.
Active managers specializing in stock and bond picking have been losing market share to lower-fee passive investment firms. The BBC pension trust has cut the amount it pays as a percentage of assets under management by a third in recent years, Duberly said.
With government bond yields at record lows, the trust has focused on buying assets offering long-term, inflation-linked cash flows. London’s $6.5 billion new ‘super sewer,’ the Thames Tideway Tunnel, is among its recent infrastructure investments.
“Assets that have a profile like index-linked gilts are particularly appealing to an organization like ourselves,” Duberly said. "That’s definitely been an area of focus."