7/27/2020 Hedge Fund Managers Are Cutting Fees Menu Search Bloomberg Businessweek MANAGEMENT FEES PERFORMANCE FEES 1.6% 20% 19 1.5 18 1.4 17 1.3 16 2008 2014 2020 2008 2014 2020 Q1 Q1 Q1 Q1 Q1 Q1 Hedge-fund fees fall to an all-time low. Source: HFR Hedge Fund Feesin Free Fall Isthe NewReality Fora Humbled Industry By Nishant Kumar, Demetrios Pogkas and Hema Parmar July 27, 2020 Hedge-fund fees had already been shrinking before the pandemic ripped through global markets. Now, they’re in terminal decline. One of London’s fastest-growing hedge funds is enticing new investors by agreeing to forgo performance fees until returns hit a key threshold. In Hong Kong, a fund boss is offering to cover all losses, a concession that’s almost unheard of in this rarefied world. And famed investor Kyle Bass has told clients he’ll charge his usual 20% cut of profits only if he earns triple-digit returns in a new fund he has started. Long notorious for charging high fees, the $3 trillion industry runs portfolios that are generally open only to institutions and affluent individuals. It’s going to extraordinary lengths to attract new money as the coronavirus pandemic triggers losses and accelerates an investor exodus that has plagued the industry for years. Many of the world’s most prominent managers have come to the stark realization that they need to upend the “two-and-twenty” fee model that’s been a fixture for decades if they want to expand. For some smaller firms, the goal isn’t growth. It’s survival. Seismic Shift Firms charging the lowest fees are seeing the largest growth in market share MANAGEMENT SHARE OF TOTAL AUM PERFORMANCE 0 Less than 1.0% fee Less than 10% fee 20 10–15% 1.0–1.5% 15–20% 40 1.5–2.0% 60 More than 2.0% More than 20% 100% 2012 2020 https://www.bloomberg.com/graphics/2020-hedge-fund-management-performance-fees/?sref=uFuNUglW 1/7 7/27/2020 Hedge Fund Managers Are Cutting Fees Note: Data for 2020 through end of June. Source: Eurekahedge “The hedge fund industry is littered with the carcasses of small funds that never reached scale,” says Andrew Beer, founder of New York-based Dynamic Beta Investments, whose firm seeks to outperform hedge funds with lower costs. “Fees in the industry are still twice what they should be.” Standout returns in the 1990s—fueled by celebrity managers such as George Soros and Seth Klarman—helped hedge funds command exorbitant prices. A 2% annual management fee and a 20% cut of profits (variously known as the performance or incentive fee) became the norm for most firms, even for startup managers with little pedigree. One selling point was that hedge funds had the flexibility to pursue strategies other money managers couldn’t. They might make big bets on assets declining in value as well as rising or even make money on the market’s volatility. But mediocre performance since the 2008 financial crisis has sparked an investor mutiny. Now even the best-known managers are coming around to the notion that they need to make some concessions to stay competitive: industry titans such as Alan Howard, David Harding and Paul Tudor Jones have all cut their fees in recent years. There are notable exceptions. Billionaire Jeff Talpins’s Element Capital Management hiked its incentive fees to 40% last year and even a discount on management fees only brought them down to the industry norm of 2%. D.E. Shaw & Co. has upped the charges in its biggest hedge fund to a 30% share of gains and a 3% annual levy. But they’re now the minority. Exclusive Club Even for the biggest hedge funds, high management fees are no longer the norm Management fees Performance fees Note: Selected funds with fee data available are shown. For funds charging a range of fees, the lower or upper figure is used depending on data available. Chart excludes Bridgewater Associates which offers client-selected fee structures. Read full methodology note Sources: Preqin; Bloomberg reporting; investor documents In the chaos of the pandemic-induced market rout, some hedge funds were able to on a long- awaited surge in volatility to boost returns. But many had their worst months on record in March, including firms run by Ray Dalio and Michael Hintze. As shell-shocked investors assess the damage from the coronavirus pandemic, the grim statistics are piling up. Clients pulled more than $55 billion from hedge funds in the first half of 2020, the most in at least a decade, according to data tracker https://www.bloomberg.com/graphics/2020-hedge-fund-management-performance-fees/?sref=uFuNUglW 2/7 7/27/2020 Hedge Fund Managers Are Cutting Fees EVestment. Hundreds of firms shuttered in the first quarter, the fastest pace in more than four years. And the number of new launches slumped to near record lows. Against this backdrop, some managers are signaling that they’re ready to waive fixed fees altogether while also offering other perks. Giving clients access to their prized research, co-investment deals allowing clients to put money into exclusive deals alongside hedge funds, and even risking all their money before clients bear the loss of a single penny are suddenly on the menu. Selwood Asset Management, the $3.5 billion London-based hedge fund run by Sofiane Gharred, invited some new clients to invest without paying performance fees until the fund hits a threshold known as the high-water mark (or the previous peak level in value). Selwood typically charges performance fees ranging from 13.5% to 30% for its main fund. Zachary Squire, who started his New York-based hedge fund Tekmerion Capital Management with backing from Alan Howard and Mike Novogratz, offers its research to clients. Squire said the research that his firm offers “to institutional investors in our capacity as a CTA” (a type of investment advisor), is a “real differentiator” and helps clients who may not have inhouse capabilities. Meanwhile, Hayman Capital Management’s Bass has proposed charging the traditional 20% incentive fee for his new fund only if the net return exceeds 100%. He’s also offering to forgo annual management fees after an upfront 2% fee to cover initial costs. The catch is that investors need to stick with his bet on the collapse of the Hong Kong dollar for two years. Paul Singer’s Elliott Management Corp., which has been in business for 43 years, is also offering lower fees in exchange for locking up capital for longer. New York-based Elliott is asking some clients to switch to a share class that will lower their fees to 1.5%, from 2%. In exchange, it will take investors 18 months to take all their money out. Hong Kong-based Infini Capital Management’s chief executive officer, Tony Chin, is offering to cover 100% of any losses, or what is called full-loss insurance. In exchange, it will charge half of the profits generated. Investing Superstars Hedge funds trace their roots back to the early 20th century but only became mainstream in the past two decades. Some consider famed economist John Maynard Keynes as the modern world’s first hedge-fund manager, with his bets on currencies, commodities and stocks in the 1920s and ‘30s. Others say that honor belongs to Alfred Winslow Jones, who opened his fund in 1949 and coined the word “hedged fund.” More recently, firms run by Soros, who famously broke the Bank of England in 1992 by forcing a devaluation of the pound, and Dalio, founder of the world’s largest hedge fund Bridgewater Associates, became superstars. Hundreds of billions of dollars in assets flowed into the industry as returns flourished. The riches filled the coffers of hedge fund managers and created larger-than-life characters who splashed their fortunes on luxurious lifestyles, bought expensive artwork and sports teams and funded political campaigns. The abundance of wealth also inspired books, movies and TV series. 199219921992 201920192019 2 02020 https://www.bloomberg.com/graphics/2020-hedge-fund-management-performance-fees/?sref=uFuNUglW 3/7 7/27/2020 Explosive Growth Hedge Fund Managers Are Cutting Fees 199219921992199219921992199219921992 201920192019201920192019201920192019 2.02.02.02.02.02.0 GeorgeGeorgeGeorge Soros SorosSoros’’s’ss bet betbet BillionaireBillionaireBillionaireBillionaireBillionaireBillionaireBillionaireBillionaireBillionaire ononon devaluation devaluation devaluation of of of LouisLouisLouis Bacon BaconBacon 1.51.51.51.51.51.5 poundpoundpound marks marks marks ascent ascent ascent quitsquitsquits industryindustryindustry 1.51.51.5 ofofof hedgehedgehedge funds fundsfunds 1.01.01.01.01.01.0 201020102010201020102010201020102010 201320132013201320132013201320132013 Hedge-fundHedge-fundHedge-fund icon icon icon SACSACSAC pleads pleads pleads guilty guilty guilty StanleyStanleyStanley Druckenmiller Druckenmiller Druckenmiller tototo securities securities securities fraud, fraud, fraud, 0.50.50.50.50.50.5 quitsquitsquits industry industryindustry payspayspays record recordrecord fi fifinenene 0.00.00.00.00.00.0 199019901990199019901990 200020002000200020002000 201020102010201020102010 202020202020202020202020 Note: Data for 2020 through March. Source: HFR The gilded era came to an end after the 2008 financial crisis. Returns slumped as central banks flooded the market with cheap money, upending traditional relationships between asset classes and economic data. Volatility fizzled and many managers struggled to profit from betting against stocks as markets entered their longest bull run in history. Over the past decade, hedge funds have produced less than one-third of the annual returns of stocks. In the first half of 2020, hedge funds lost 3.4%, slightly more than the decline in the S&P 500 with dividends included, another underwhelming performance for an industry that traditionally promised to protect, or hedge, against losses in bad times.