Gotham Hedge Fund Explores Shifting Fees to Tie Pay to Returns

  • Fees may change to 1 percent of assets or 30 percent of alpha
  • Gotham in talks with some investors about Neutral Strat fund

Gotham Asset Management, the $6 billion money manager run by Joel Greenblatt and Robert Goldstein, is exploring a new fee structure that ties more of the fund’s pay to performance.

The firm is in talks with some investors for its Gotham Neutral Strategies hedge fund about charging one fee: the greater of a 1 percent management fee or 30 percent of returns that exceed the fund’s benchmark, according to two people familiar with the matter. The equity fund currently charges 1.5 percent of assets in management fees and 20 percent of profits, one of the people said.

Hedge funds have been trimming and altering their fees amid a backlash over lackluster returns and criticism that the standard model of charging a 2 percent management fee and a 20 percent incentive fee is too expensive. Most hedge funds charge investors too much for the performance they deliver, Greenblatt, who is Gotham’s co-chief investment officer, told Bloomberg Television in a May 2014 interview.

The Gotham Neutral Strategies fund gained 7.5 percent last year, according to another person familiar with the matter. The HFRI Market Neutral Index was up about 2 percent in that time. Since inception in July 2009, the fund has gained an annualized 7 percent.

If the new fee structure is adopted, Gotham would join Hong Kong-based hedge fund Myriad Asset Management and others in moving to the 1-or-30 model, which has been championed by investors including the Teacher Retirement System of Texas.

Click here for more on how the fee shift is spreading to Asia

As of mid-February, at least 16 multi-billion-dollar hedge funds worldwide are either in the process of implementing or have implemented the 1-or-30 fee structure that was introduced to the industry in the fourth quarter of 2016, Jonathan Koerner of Albourne Partners said in a telephone interview on Feb. 16.

“The objective of ‘1 or 30’ is to more consistently ensure that the investor retains 70 percent of alpha generated for its investment in a hedge fund,” Koerner wrote in a white paper published in December by Albourne, which advises clients on more than $400 billion of alternative investments globally. The management fees charged in a year when the fund underperforms the benchmarks are deducted from the following year’s performance fee payment, making it, in effect, a prepaid performance fee credit, he said last month.

The Gotham Penguin Fund, which wagers on and against U.S. stocks, gained 25 percent last year, according to one of the people familiar with the matter, compared with a 5.4 percent rise in the HFRI Equity Hedge Index. Since inception in 2013, the fund has returned an annualized 15 percent.

A representative for the firm declined to comment.

— With assistance by Saijel Kishan

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