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May 17, 2009 10:21 am
Hedge funds of funds want the hedge funds they invest in to charge lower management fees and levy performance fees on a three-year rolling basis.
Fees have moved from 1 per cent a year plus a 20 per cent performance fee in the early days of funds of hedge funds to a norm of 2 and 20, said Alexandre Col, head of the investment fund department at Banque Privée Edmond de Rothschild. The Geneva-based group has run funds of hedge funds since 1969 and has $8bn (£5.2bn, €5.9bn) under management.
“When you see how much money hedge fund managers are making for themselves, they could easily take the fee back to 1 per cent as a maximum,” he said. A lower management fee was much more important than renegotiating performance fees, he added, although he believed the structure of those should change too.
However, he is against some of the proposals being put forward. “Some people say you should only pay [a performance fee] when you redeem, or only on realised profits.” The first is impractical for hedge fund managers, said Mr Col, particularly where investors hold funds for long periods, as Banque Privee does. The second shows a misunderstanding of portfolio construction and is “very dangerous”.
He favours calculating performance fees on a yearly basis, but charging over a three-year period, so the investor pays one-third in the first year, with the rest at risk.
He has not put these ideas to hedge fund managers yet because regulatory issues were currently the main concern, he said.
Mr Col’s view of the proposals for regulating hedge fund managers put forward recently by the European Commission is mixed. He is in favour of managers being regulated: “Someone managing money should get a licence to do it.” And the approach to sales is correct. “If you want to raise money from European investors you need to follow a few rules.” Disclosure requirements are reasonable as well, provided information is for regulators, not the market.
But interfering with how hedge funds run money is going too far. He is concerned that many politicians “don’t really want to regulate hedge funds for the sake of regulating them. They want to destroy them – they don’t want them in Europe any more.”
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