Towards A More Pragmatic Fee Regime


Hedge fund fees overall are probably going down although Funds of Funds and less successful funds will be hurt more than most.


A decade ago the “Capital Market Revolution!” ushered in a vision of a world where the mutual fund industry would have to abandon its 500 basis point bid/offer spread and ridiculous management fees in favour of a more commoditised approach pertinent to the service they provided.

Hedge funds would sweep in towards the mainstream and, where they performed well, their fees of 2 and 20 would be maintained. Simpler tracker funds would charge tiny commoditised fees as the Exchange Traded Fund movement gained traction.

At the time of course, many laughed – particularly in the mutual fund industry, at the temerity of this view.

A decade later and the mutual fund industry is still adjusting to the twin hedge fund / ETF threat but the hedge fund industry itself looks exposed.

The simple fact is that a great fund that generates alpha and outperforms the market can doubtless generate fees in the 2 and 20 range all day long but alas that looks pretty steep for the many less significant performers in the industry. 1 and 10 will become the order of the day for a great many funds (particularly newcomers) although ironically one justifier for higher fees remaining may in fact be the higher costs of regulation in line with the demands of many governments currently…

One area where fees need to collapse is in the ludicrously over-priced fund of funds arena. There are too many intermediaries gaining monopoly rents for what is in essence a remarkably replicable model (due diligence and some tricky sums but frankly no great rocket science in many respects that cannot be largely commoditised and charged accordingly). Moreover, with so many funds of funds having been proven to be it seems somewhat remiss (to put it mildly) in their due diligence processes (qv Madoff), the lowering of fees is going to be somewhat unrelenting. In essence, FoF is a commoditised business and as such ought to be charged as basis points not the staggering add-ons that have become the norm in recent years.

One key issue in the whole fund reduction arena will probably be a wholesale blood-letting disintermediating (or at least chopping the fees!) of the great many opaque middle men in the hedge fund industry. Their rollodexes were over-valued in the past few years and now they will need to consider their value in a more commoditised world…


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