Watson Wyatt criticises high fee structure
Leading pension consulting firm Watson Wyatt has criticised the way some hedge funds are charging investors expenses for their own team-building days, stationery and staff bonuses on top of their standard 2% fixed management fee, in an effort to help cover falling profits from performance fees.
Damien Loveday, senior investment consultant for manager research at Watson Wyatt, dubbed such fees “murky”, and said managers who imposed them sometimes effectively raised the management fee their investors shouldered from 2% to 7%. Hedge funds typically also take 20% of new profits they make as a performance fee.
One investor said he had seen one London hedge fund charge separately for travel expenses to promote a new fund in the US. He said there was no widely-accepted industry standard on what could or could not be charged as extras to investors.
Paul Meader, director at UK fund of hedge funds manager Corazon Capital, said unwary investors could face “a large number of fees lurking below the surface” and he expected extra charges would increase the effective management fee for a hedge fund with $100m (€67.6m) to $200m assets by between 0.25% and 0.5%.
He said he would “take a pretty dim view of funds charging marketing and travel expenses to the fund, because the fund’s manager or sponsor should pay that”.
John Godden, founder of UK fund consultants IGS Group, said it was not always easy for investors to see exactly what extra activities or office expenses they were paying for, as jurisdictions where many funds were established imposed differing levels of disclosure about fees on funds, with centres such as Jersey and Ireland among the more stringent and Caribbean islands less so.
The 3.5% average loss by hedge funds this year to July 31 has left many unable to cover their costs comfortably using the fixed charge and performance fee.
Godden added many hedge fund managers were paying more fixed costs such as for IT and research, as investment banks scaled back what they provided to hedge fund clients to induce them to trade with them. He said hedge fund losses meant “managers are seeing what they can charge to the fund”.
Chris Mansi, senior investment consultant at Watson Wyatt, said some funds of hedge funds had concentrated more on getting access to skilled managers than on the fees they charged, and had been “relatively poor” in tackling the issue of extra fees.
Tom Brown, head of KPMG’s European investment management practice, said The Hedge Fund Working Group, a standard-setting body established by 14 large hedge fund managers last year, had recommended managers make very clear to investors that managers could charge fees to the fund and that funds’ boards be actively involved in controlling and authorising which fees were charged to the fund and its investors.
The group said in January in its final report on industry standards that hedge fund managers should disclose all fees and expenses and how they were calculated, as well as “details of the nature of any expenses ... payable or reimbursed by the fund to the manager”.
The group said managers should also consider revealing their funds’ total expense ratio, which would include extraneous fees as well as core management and incentive fees.
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