Published: January 12, 2007
Hedge fund uber-guru Lars Jaeger seems to be at odds with the industry he helped create. He tells HedgeWeek.com that hedge fund replication strategies are a close-enough approximation of hedge funds – and much cheaper. Says HedgeWeek:
“According to Dr Lars Jaeger, who is responsible for the development of the programme, it is based on the realisation that although hedge funds bill themselves as generators of alpha, with fee levels to match, in reality 80 per cent of their returns are attributable to beta, albeit of a different kind to that in the long-only markets.”
Jaeger is quick to point out the potential cost savings involved with cutting fees at several levels. Continues HedgeWeek:
“Jaeger says that a total saving of between 220 and 330 bps is offered by the elimination of a layer of management fees. The ABS programme charges a management fee of 1.25 per cent and a performance fee of 15 per cent, compared with the classic 2 and 20 formula of hedge fund managers plus 1 and 10 above US Libor for funds of hedge funds.
“A second area of saving worth between 40 and 80 basic points stems from the fact that the ABS performance fee is only payable on netted performance. By contrast, funds of hedge funds pay performance fees on funds delivering positive performance but do not get a corresponding rebate from those that lose money.
“…a potential further 40 to 80 bps can be obtained through cash management because the ABS programme typically uses instruments such as futures and options that are traded on margin and allow cash to be employed several times. By contrast, funds within a fund of funds portfolio may typically be paying Libor+45bp for leverage but receiving only Libor-35bp on their excess cash.”