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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...................... To view our full article Click here
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