By Susan Barreto
specialist consultant, a fund of hedge fund's chief investment
officer and a single strategy hedge fund manager enter a US
public pension fund trustee meeting. And before you think this
is the beginning of a corny joke it is not. This is serious.
This is a real live group of players that are not able to speak
openly and honestly in each other's presence when the topic of
fees comes up.
A silent war is being waged when it comes to fees and
despite the mandatory transparency requirements for the hedge
fund industry, somehow for fees there is zero and investors
have little to lean on. Following the financial crisis most
large investors forced down hedge fund manager fees via managed
accounts or by funds-of-one, but now the push back is in
multi-manager portfolio construction.
When it comes to fees every underhand trick is being played
and even Sun Tzu, author of The Art of War, would be shocked.
This battle could be bloody.
The theory among pension fund executives has been that funds
of funds are the most expensive way to arrive at a diversified
portfolio. More pension boards this year are once again looking
to add individual managers to their hedge fund portfolios to
save on fees.
These CIOs have now devised a new way to get the job done as
a battle rages in the distance between funds of funds and
investment consultants. Rightly, or wrongly, pension fund CIOs
are deciding in ever increasing numbers that FoHFs can no
longer charge 'hedge fund' fees for services that are
tantamount to consulting work.
In the case of Sacramento County Employees, Illinois
Teachers' Retirement System and Colorado Fire & Police,
FoHF managers have been picked to structure advisory
arrangements that are far less lucrative than the traditional
'1 and 10' fee arrangements of commingled accounts.
One pension executive recently told InvestHedge he flatly
refused to pay hedge fund fees for a FoHF's services. It wasn't
a line he felt comfortable advocating other pension plans to
take, but a necessity to improve the bottom line of his own
hedge fund portfolio.
To survive, some FoHFs are offering side deals to hold on to
mandates of over $100 million. For these they will offer to
help investment executives research, source and monitor single
managers at little or no extra cost to the client. Whether or
not this is a sustainable and ultimately healthy long term
option is a different topic.
But it seems that at least for now such a tactical FoHF
manoeuvre to keep specialist consultants from eating their
lunch is necessary. That said, specialist consultants seem to
be able to keep up with hiring teams and opening new offices.
For example, Aksia recently opened its fifth office for
research and advisory purposes in Hong Kong.
Does this mean FoHFs were overcharging investors all along?
Or are consultants doomed when it comes to competing with the
free research and monitoring being offered by funds of
It is too early to say who will need to back off first from
their competitive pricing scheme, but it seems that those
pensions with direct hedge fund portfolios at least in 2011
were slightly better off in terms of returns than those that
employed both FoHFs and single managers. That statistical
anomaly may be due to fees, but it may also be due to the fact
that FoHFs are perhaps more broadly diversified than single
manager portfolios that seem to be biased toward directional
Investors focused solely on fees may be missing the big
picture and putting themselves at risk of having another
portfolio revamp in another year or so, when their current set
of strategies need a rethink.
Who will then collect the fee for the advice at that turning
point is quietly being determined behind the scenes in today's
institutional market place.