Hedge funds yet to budge on fees or liquidity terms
Hedge funds have defied the expectations of investors who had hoped the catastrophic losses suffered by the industry last year would result in an improved deal, with fewer than one in 100 managers reducing fees or improving their liquidity terms.
Last year, hedge funds staggered to their worst recorded annual loss, of 19%, according to data providers Hedge Fund Research, leading many investors to expect hedge fund managers to lower their fees and reorganise how they charged them. Clients also expected that they would be allowed to exit portfolios more quickly and often.
However, few funds have budged from historic fee levels and structure, according to research on about 2,600 funds published yesterday by French investor Olympia Capital Management.
The research found that less than 1% of fund managers had adjusted their liquidity terms – which includes their redemption frequency or notice periods investors must give to exit – in the 12 months to May. A similar proportion had not changed any lock-up periods they imposed on investors.
Guido Bolliger, Olympia's chief investment officer, wrote in the study that "the vast majority of funds that altered their liquidity terms worsened them; redemption frequency, notice periods and lock-up became generally longer. And contrary to expectations, there were no significant changes in both the level and the structure of fees taken by existing funds."
HFR monitoring has also shown that performance-based charges has fallen little, from 19.3% at the start of this year to 19.2% in the second quarter.
This is despite the predictions that lower levies would be driven by the waning demand for, and poor performance by, hedge funds.
Hopes of large decreases were dashed in part because "hedge fund managers face buyers who have themselves lost bargaining power...and who are fragmented," Bolliger said.
He added that, in addition, investors had "almost no new money to invest in hedge funds during the first quarter" - the period at which hedge funds' own bargaining power was at its nadir, and the power of new cash as a bargaining chip was at its zenith.
Bolliger said investors may now have lost their chance to force better terms from existing funds, although more favourable terms might be applied to new products.
"Given the strong recovery in performance and the decrease in outflows there is a good chance investors may not be able to negotiate significant fee reductions with existing hedge funds," he wrote.
Hedge funds made 14% this year, according to HFR . Last month they took in $4.5bn of new money from investors, according to data provider Eurekahedge
-- Write to David Walker at dwalker@efinancialnews.com
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