Investors who want a piece of top-name hedge funds used to have little choice but to accept the cruel terms of admission. These included high fees (sometimes in excess of the industry standard 2 percent management fee and 20 percent performance fee), gates and lockups — all tilted in favor of the hedge fund manager.
No more.
With many banner-name hedge funds down and desperate for capital, managers are suddenly more accommodating than before.
Take Perry Capital, the $8.8 billion New York–based hedge fund firm with a reputation for being pricey. Its flagship fund, Perry Partners International, was down 26.8 percent last year, the first annual loss in its 20-year history, inciting CEO Richard Perry to offer investors a new deal — if they wanted one.
He says he will lower his performance fee to 10 percent (from 20 percent) until the fund recovers two and a half times its losses. (Perry has a ways to go; the fund was up barely 1 percent through early April.)
David Shukis, director of hedge fund research and consulting at Boston-based consulting firm Cambridge Associates, says such changes are “probably in the interests of both parties.” Charging a management fee allows funds to pay their employees, and a deal like the one Perry offers is preferable from an investor’s point of view because it’s better than if he shuttered his underwater fund and started over with full fees, as some managers have done (which Shukis considers “very distasteful”).
A fund manager doesn’t necessarily make such changes out of the goodness of his heart. Sometimes investors demand it. The $171 billion California Public Employees’ Retirement System is considering pushing for staggered payment of performance fees or for clawback agreements on fees, and the $56.3 billion New Jersey state pension system recently redeemed an investment with $10.1 billion New York–based GoldenTree Asset Management after the firm said it was going to curtail investor liquidity rights (see “Second Thoughts About Alternative Investments”).
But Stephen Nesbitt, head of the influential Los Angeles–based investment consulting firm Cliffwater, says the talk of fee reform is often just that: “There is a lot of saber rattling going on at the moment.”
Nesbitt says he does see more attractive terms for investors from managers who are trying to launch new funds. For instance, $10.7 billion Chicago-based Citadel Investment Group is charging a two-and-20 fee on its new global macro fund, terms that may not sound like a steal but aren’t bad compared with past Citadel standards. The firm has always charged for expenses rather than imposing a 2 percent management fee, a costly proposition that has dinged investors for as much as 8.75 percent of assets in recent years.
