European hedge fund joins ‘50% performance fee club
A hedge fund managed in Europe is on a select list of fewer than a dozen portfolios known to retain half their profits as performance fees, showing some allocators will stomach more than double the typical level in some cases.
The best-known manager to charge a 50% incentive fee was Steven Cohen at SAC Capital, but since 25 April, Lyxor/Weiss Multi-Strategy Fund Ltd, incorporated in Jersey, does as well.
Before that date is charged a 40% incentive fee plus a 3% management fee, though an announcement it made to the Irish stock exchange said investors had approved its dropping the fixed fee and hiking the performance-based one.
According to the Morningstar hedge fund database, between 16% and 17% is the average performance fee for hedge funds, and only nine on its records – including three versions of the Trafalgar Trading fund – levy 50%.
The others are LJL Secured High Income Fund I, International AB, Luxembourg Life Fund J, Whitehaven Correlation Fund Segregated Portfolio, A-Venture Capital SA Euros Signals, and Barbashop Program.
An analyst at the Morningstar database said: “When analyzing hedge fund fees, investors should incorporate all relevant information. Obviously investors should be extremely skeptical of high fees, but if the strategy isn’t scalable – that is, the fund can only withstand a small amount of assets – or investors are gaining access to highly-coveted talent, then high fees might be justifiable.
“Also, if a hedge fund charges a high performance fee, but no management fees, the total fee level may be comparable.”
Management fees range between 1.5% and 3%, though a growing number of funds are eliminating this entirely, and living or dying only on their incentive charge.
Hedge fund fees have generally fallen since the crisis of 2008/2009, after the industry’s worst annual performance on record gave widespread bargaining power to investors, arguably for the first time.
However, the fees are only slightly lower than the 20% the industry’s founder Alfred W Jones charged his American clients in AW Jones & Co, back in the 1950s.
An article in Fortune magazine in 1970 tracking the industry’s development since inception said of the performance fee: “The glories of this arrangement, given a reasonably good stock market, explain why so many money managers have been inspired to start hedge funds.”
Hedge fund managers losing 20% of their investors’ money in 2008, just one year after retaining 20% of the 9.9% gains they made on about $1.9trn of combined assets in 2007, explained why so many investors were ‘inspired’ to pull their money out of the industry after the financial crisis.
Recently, more alternative funds’ managers have eliminated the asset-based fee and relied only on their performance, arguing this is fairer for investors.
The Axiom fund of alternative Ucits funds cut its management fee to nil last week, and installed a more modest 10% incentive-based fee.
Axiom’s board chairman Alessandro Mauceri said it was one way fund managers could align their interests better with the interests of their investors.
A spokeswoman from $1.7bn manager Weiss Multi-Strategy Advisers LLC said her New York-based firm did not manage the Lyxor/Weiss portfolio, and as Lyxor was the manager she declined to comment in their place. Lyxor did not return a call made yesterday seeking comment.