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Michael P. Regan

Another Nail in the 2-and-20 Coffin

Fees drop as investors sour on hedge funds amid a stretch of lackluster performance.

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.