Warning to those colleagues sitting around my desk: my head will likely explode if I read another media story about high hedge fund fees. But thankfully for our cleaning staff, Business Week’s story this week “Suddenly Hedge Fund Fees Seem High” isn’t really about hedge funds and it’s certainly not about anything “sudden”. In fact, this story is so 2005.
As the article itself points out, BW itself published a piece nearly two years ago called “A Fee Frenzy at Hedge Funds”. So we’re not sure what the “sudden” realization is. But more importantly, the article seems to take greater issue with private equity than it does with hedge funds anyway.
Still, the article refers to CalPERS CIO Russell Read’s comments a few months ago about hedge fund fees. Read was widely reported to have problems with hedge fund fees. But he actually left the door wide-open for high fees when he made his remarks in Geneva. Said Read, “We have no problem paying high-performance fees for a manager’s selection, but we find taking on average market risk inherently unsatisfying.”
No argument here. High fees for “market risk”: bad. High fees for alpha: good.
But curiously, this second point seems lost on the mainstream media. For its part, Business Week points to Read’s comments as an example of how “institutional investors have started to complain, noting that the average hedge fund failed to keep pace with the market in 2006”.
Ironically, if hedge funds had simply levered up a market ETF to “keep pace with the market” (or even beat it) it seems Business Week would have been happy while Read would have been (rightly) disappointed.
Business Week then goes on to compare hedge fund fees to passive ETFs at 18 bps(!) A more appropriate comparison would have been between hedge funds and, say, small cap or emerging market equities – whose fees are a lot closer to 100 bps for institutions and a lot more for individual investors. (Even then, such long-only fees would have to be adjusted upward to compare “alpha to alpha”)
In a development sure to make Fung & Hsieh pleased, Business Week suggests that hedge fund replication will put downward pressure on fees. But before we get too excited about Goldman Sach’s “Absolute Return Tracker” offering flooding the market with cheap hedge fund clones, the early word is that Goldman will charge a 75 bps index fee. Once you package-up a security based on this index, the fee will likely be over 100 bps. And other entrants into the replication business already charge similar fees to replicate real hedge fund returns that some have pointed out are measured net of fees.
Sure, 100 bps might make some hedge fund charging 2 and 20 to think again, but the poster children of the “exorbitant fees” movement (e.g. Simons et al) probably aren’t losing any sleep over it.
CalPERS’ Read is right. Some hedge funds (and, we add, many mutual funds) are poor value. But he also seems to suggest that sticker-shock should not replace logical decision making.
– Alpha Male