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Bailey McCann, Opalesque New York:

A new letter from a group of institutional investors is calling for changes to hedge fund fees.

The group, led by the Teacher Retirement System of Texas wants to see cash hurdle rates included in the incentive fee structure for hedge funds. The investors argue that if hedge fund managers can't outperform the current cash rate of return they shouldn't have to pay management fees.

"A hedge fund may collect significant incentive fees based solely on skill-less returns generated from short rebate, securities lending, unencumbered cash, etc. These returns are easily obtainable by LPs outside of a hedge fund structure for free. Earning cash returns is not the reason institutional LPs invest in hedge funds," the letter said.

The letter offers one example - In 2023, a $1B market neutral hedge fund could have earned ~$52 million (5.25%) returns just by holding cash, and if that fund charged a 20% incentive fee on absolute returns, would have taken home $10.5 million in compensation for taking zero risk. This reality undermines how investors view hedge funds and could be a danger to the longevity of some strategies and hedge funds as an asset class, investors argue.

"We recognize that the implementation of cash hurdles means adjustments to fee schedules and operational procedures within funds. However, it is our firm belief that the long-term benefits of proper alignment vastly outweigh short term challenges," investors wr......................

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