Net effect of HF redemption/re-allocation cycle: billions in additional fees
| Jun 9th, 2009 | Filed under: Investment Management Fees, Today's Post | By: Alpha Male |
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The cast and crew of AllAboutAlpha.com are in Bermuda for part of this week and today I had lunch with some local dignitaries from the island’s highly respected hedge fund administration community. The topic of fund liquidations came up as we discussed the phenomenon of hedge fund managers closing down one (underwater) fund only to open up another that does not have to make up for previous losses before it charges a performance fee.
I have not yet seen any hard research on this phenomenon, but it couldn’t be that hard to complete. Like many facets of hedge fund manager behaviour, we often assume that the economic interests of a manager dictate reality. The reality for many managers who close down may not be so bright.
But regardless, closing down an underwater fund is tantamount to removing a (hard-won and costly) fee discount that stands to accrue to investors. After paying performance fees in the good times, investors expect managers to stick around in the bad times.
However, as we have seen in the past year, many investors also did not stick around in the bad times. By redeeming their investments, those investors have voluntarily relinquished their right to a hard-fought performance fee holiday.
While some former hedge fund investors may have sworn off them for good, many who redeemed last year will likely re-invest in hedge funds in the near future. In fact, a Barclay’s Capital report released last week predicted that asset inflows were just around the corner. Like water in a child’s bathtub, it seems that assets slosh out of the industry only to slosh back in again.
Lipper predicted the same thing just yesterday. As Reuters report: More…
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