Photographer: Thomas Trutschel

The Incredible Shrinking Hedge-Fund Fee

Michael P. Regan is a Bloomberg Gadfly columnist covering equities and financial services. He has covered stocks for Bloomberg News as a columnist and editor since 2007. He previously worked for the Associated Press.
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There’s a lot to be amused about in the tale of the Rev. Emmanuel Lemelson, the Greek Orthodox priest who moonlights as a hedge-fund manager. Or is he a hedge-fund manager who moonlights as a priest? Hard to say. Maybe it all depends on your denomination.

First, there are the two rules he requires of his flock (talking about his investors here, not his congregation): Pray for the fund and disregard short-term performance, according to the profile of Lemelson in Tuesday’s Wall Street Journal. There is the epiphany Lemelson said he had when he discovered the "good book" -- that would be “The Intelligent Investor” by Benjamin Graham. There’s the candid truth that when investment seeds fall on rocky ground, even men of the cloth stop reporting returns to industry-tracking services like BarclaysHedge.

And there’s also the general sense that some members of the church aren’t exactly thrilled about this mansion-dwelling, motorcycle-collecting millionaire with a wife who drives a Cadillac Escalade.

“He doesn’t belong to us," one church official told the paper.

For sure, the hedge-fund community is probably more accepting of the extracurricular activities of managers. Still, many may pause when they learn this about Lemelson: His performance fee is 25 percent!

“He doesn’t belong to us," many hedge fund managers (probably) exclaimed at this point.

The notion that hedge funds all collect a stereotypical management fee of 2 percent and a performance fee of 20 percent has been dying a slow death in recent years, especially for smaller, newer funds. Average performance fees for newly launched funds last touched 20 percent in 2007 and have fallen to about 14 percent as of August of this year, according to research firm Eurekahedge.

There are two main trends behind this, in Eurekahedge’s assessment. One of them is obvious and the other not-so-obvious. First, even though hedge funds as a group outperformed underlying markets during the financial crisis, they still racked up nasty losses. As a result, their fees came under scrutiny. The other trend has been a preference among big institutional investors to place money in larger hedge funds, causing smaller startups to lower their fees in order to attract investors.

In any event, if you’re a manager of a small hedge fund, this tale of a levered-up stock picker collecting a 25 percent performance fee may come as encouraging news. But you’ll have to ask yourself one important question first: What size cassock do you wear?

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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Michael P Regan at

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