Hermes restructures hedge fund fee model
Hermes, adviser to the UK's largest pension fund, has become the first manager to voluntarily change the way it charges investors in its funds of hedge funds, in a move by one of Europe's most prominent managers that could pave the way for rivals to do the same.
The firm, which advises the £31bn (€35.4bn) BT pension fund on its investments, is planning a new share class for its $1bn (€690m) Hermes BPK and $340m restructuring funds of hedge funds.
It will give investors the option of having their performance fees for each year's performance collected by Hermes in equal instalments over three years, rather than paying it over in one chunk a year, as is typically the case for the industry.
Matteo Perruccio, chief executive of Hermes BPK Partners, said collecting incentive fees over longer timeframes discouraged managers from taking excessive risks in the short term, and led to a better alignment of investors' long-term interests with the activities of the manager.
Some investors in hedge funds have criticised paying incentive fees annually, saying it discourages managers from investing for the long term, which is what many investors in hedge funds prefer.
Sandra Manzke, a veteran US investor in hedge funds, said late last year that managers had become rich on the fee in a good year, but had left many investors who paid it out of pocket if the fund lost its previous gains the following year.
Perruccio said: "What is important is to be aligned with the client. A lot of investors are focusing less on reducing fees, and focusing more on the structure of those fees. It's the way the fee is charged that is the primary problem."
Perruccio said Hermes' funds would receive the performance fees from investors in three annual instalments. If investors redeemed during this period, they would be refunded any performance fee they had paid for periods when their fund did not perform.
Hermes is one of the first funds of hedge funds to state publicly it planned to alter the structure of fees on its ready-made products, and it is also one of the first to effect the change without strings attached.
In July, Swiss rival Gottex Fund Management cut the fixed fee on its listed Market Neutral Trust from 1% to 0.75%. However, this reduction was contingent on investors having passed a ballot allowing the fund to continue.
Other hedge funds to have lowered fees in a quid pro quo for investors making various concessions - often agreements to remain invested for extended periods - include RAB Capital, Ramius and Perry Capital. Some funds have also lowered fees this year in a bid to attract investors after the industry's record losses last year.
Hermes is keeping the performance fee for its products at 10% of fresh profits, and the fixed fee at 1% of assets. Investors will also still have the option to invest in Hermes via share classes that levy the fees annually.
--write to dwalker@efinancialnews.com
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