Hedge Funds Ramp Up Investor Incentives with Fee Discounts

Newly formed hedge funds turned to lower fees and seed deals to attract investors in a challenging year for capital raising, an industry law firm reported.

More than two thirds of market entrants offered fee discounts in exchange for longer lock-up periods in 2015, according to a study of new hedge funds by Seward & Kissel. Additionally, 35% of equity hedge funds implemented tiered management fee structures, with rates decreasing as assets under management increased—up from 25% last year.

One fund even offered a tiered structure for incentive fees—the first to do so in the six years the law firm has been conducting the annual study.

“The 2015 study reveals a more even balance of power between hedge funds and investors,” said Steve Nadel, a Seward & Kissel investment management group partner. “More funds found it necessary to lure investors with reduced fees, but at the same time, investors understood that many strategies warranted a longer redemption cycle.”

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Management fee rates for new funds averaged 1.64%, a slight decrease from last year’s 1.7% average. Incentive fees, however, remained steady at the traditional 20% rate.

Equity strategies—by far the more popular offering in 2015, with four equity hedge funds for every non-equity fund—were the most expensive, with average management fees of 1.68%. Non-equity funds, meanwhile, charged management fees of 1.56%, a difference Seward & Kissell attributed to investor demand.

Of all funds, 64% offered founders classes, which included a management fee rate that was 50 basis points less than those charged in the flagship class, and incentive fees of 16%. As many as 82% of equity funds had founders classes, compared to just 29% of non-equity funds.

New hedge funds also looked to seed investments as a way of securing assets, with an estimated 35 to 45 seed deals occurring in 2015, according to Seward & Kissel. One-third of these investments were more than $50 million and a quarter totaled more than $100 million.

seward Source: Seward & Kissel’s “2015 New Hedge Fund Study“

Some of the most influential asset owners worldwide are shortlisted for a new satellite office category at CIO Europe's Industry Innovation Awards on June 2 in London.

Pension funds from Sweden, Denmark, Switzerland, the Netherlands, and the UK are among the nominees for this year’s CIO European Innovation Awards.

Oh, and Canada, the US, Korea, and Kuwait.

As 18^th century writer Samuel Johnson once famously said, “Sir, when a man is tired of London, he is tired of life; for there is in London all that life can afford.”

While residents of New York, San Francisco, Paris, Berlin, and countless others may dispute this, an elite group of asset owners have embraced the UK capital as a vital part of their strategy. As such, for the first time, this year CIO will be shining a light on those investors who have set up a home away from home in one of the continent’s major cities.

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Accompanying the likes of AP4, PensionDanmark, the Universities Superannuation Scheme, and APG along the proverbial red carpet on June 2 at the Rosewood Hotel will be the Teacher Retirement System of Texas (TRS), Canada Pension Plan Investment Board (CPPIB), Korea’s National Pension Service, and the Ontario Municipal Employees Retirement System (OMERS).

They are among eight non-European asset owners nominated for the inaugural Overseas Office award. This prize has been designed to recognize those investors who have dedicated time, money, and resource to a physical, long-term presence in Europe, adding value to their portfolios and benefitting their members in the process.

“Oftentimes a key driver of success can come from having boots on the ground, local knowledge, and better access to deal flow,” says Amir Saleem of consultant bfinance’s sovereign advisory group. “An office in London can make good sense, not only in terms of opportunities available here in the UK with its mature and well-developed market, but it can serve as a hub to cover the wider European region.”

TRS was the first US pension to set up shop in the UK capital when it placed Vaughn Brock, former director of special projects, in charge of the new office in September last year. The pension believes it can triple its exposure to potential property deals with a presence ‘on the ground’ in one of Europe’s most attractive real estate markets.

One of TRS’ peers to the north, OMERS, established a London office for its private equity subsidiary in 2009. Led by Senior Managing Director Mark Redman, the team has been involved in transactions worth more than $5 billion. These included two in collaboration with the Alberta Investment Management Company (AIMCo). In 2013 the pair bought cinema chain Vue for £935 million, and last year—following the opening of AIMCo’s London office in 2014—they bought Environmental Resources Management for $1.7 billion.

Why come to London? The answer is usually simple: It’s the finance capital of Europe, after all. Announcing CPPIB’s office opening in 2008, then-CEO David Denison said it would allow earlier identification of investment opportunities, and make it easier to monitor its significant existing investments in the UK and Europe. “As a global investor, opening an office in London is a logical step as we expand our presence internationally,” he added.

The importance of a local office was highlighted just last month when AIMCo, Ontario Teachers Pension Plan, and the Kuwait Investment Authority collaborated to buy City Airport, the most central of London’s air transport hubs. All three have offices in the UK capital.

The full shortlist, along with the shortlists for nine asset owner and 13 asset management and servicing awards, are now available on the Innovation Awards microsite.