Hedge Funds: Are High Performance Fees Worth It?

(August 30, 2013)—Hedge funds charging higher performance fees are, on average, producing better returns, according to data from Preqin.

At the top end, funds that charge upwards of 20% in management fees produced the strongest risk-adjusted returns.

Funds making positive returns each month since inception charge investors an average of 19.5% in performance fees.

At the opposite end of the performance scale—defined by Preqin as only having positive returns a quarter of the months since inception—funds charge only 16.67%. Only funds with at least a three-year track record were included in the calculations.

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“Investors are satisfied to pay higher compensations to those managers that have produced strong performance,” Amy Bensted, head of hedge funds products at Preqin, said. “The funds with the highest fees have also shown to offer other concessions to investor demands.”

However, Bensted recommended investors should not discount funds with higher performance fees as they have “demonstrated their ability to meet these goals over the long-term.”

Despite evidence that firms that charge more are producing better returns, investors are still concerned with the alignment of interests between them and their hedge funds.

Only 64% of investors believed their interests are well aligned with those of the managers, with 55% seeking reductions in management and performance fees.

Preqin’s data arrived on the back of research from Morningstar, which showed an overall rise in hedge fund performances in July this year.

The Morningstar and MSCI’s composite hedge fund index increased 1.1%, giving its year-to-date index a push to 4%.

Global stock and bond indices as well as MSCI World NR global stock market also saw a climb in numbers.

“Most hedge fund strategies notched gains in July following June’s decline,” AJ D’Asaro, a fund analyst at Morningstar, said.

Developed market strategies performed the best with an advancement of 2.0% in July, turning its year-to-date figures to 6.4%. North American, small-cap, European, and unhedged European funds all performed well.

However, some funds struggled amidst the rising trend.

The Morningstar and MSCI’s emerging markets hedge fund index increased only 0.7% in July and 2.7% for its year-to-date, possibly due to slow growth and high inflation. Fixed income index and fixed income arbitrage index also saw weak returns.

Indexed systematic trading funds fell 0.4% in July, contributing to its year-to-date fall of 1.8%. This two-year downfall is partly caused by hedge fund strategies struggling to adjust to market volatility and its impact on trading algorithms, Morningstar said.

The data also showed positive net inflows for single manager and multi-strategy hedge funds for the first half of 2013.

Single-manager hedge funds saw outflows of $851 million but gathered $1.3 billion in inflows for the year so far, while multi-strategy hedge funds found outflows of $1.4 billion but maintained a positive net flow of $417 million for the first half of 2013.

Systematic trading strategies saw an outflow of $267 million in June, adding to its year-to-date number of $3.6 billion.

Contact the writer of this story:

Sage Um

Assistant Editor, aiCIO
sum@assetinternational.com

Follow on Twitter at @ai_CIO

(August 28, 2013) – It’s not often you’ll hear investors calling for more regulations, but an international consortium of some of the biggest pension funds and asset managers have done just that.

A total of 44 institutions have written to the US Securities and Exchange Commission (SEC) to urge the adoption of a single, consistent global standard for all tax and royalty payments made by oil, gas and mining companies in a drive for greater transparency.

A further 33 institutions (some of which also signed up to the SEC letter) have appealed to Natural Resources Canada with the same demands. The move reflects a growing global trend aimed at deterring corruption in resource-dependent countries, which was started with the passage in 2010 of tough extractive sector transparency provisions within the US Dodd Frank Act.

The EU’s Transparency and Accounting Directives followed in June 2013, while in Canada, Prime Minister Stephen Harper told the G8 Summit he planned to follow suit with similar regulations for Canadian listed extractive companies.

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However, a July ruling in a US District Court on a suit filed by the American Petroleum Institute is threatening to block the US regulation, forcing investors to collaborate to highlight the importance of high standards of transparency and consistent global regulation.

Among the major players signed up to the two separate letters are: Swedish pension funds AP1, AP2, AP3, AP4 and AP7; the UK’s Local Authority Pension Fund Forum and RPMI Railpen Investments; the Netherlands’ PGGM, APG, MN Services, and Robeco; as well as tens of asset managers.

Frank Curtiss, head of corporate governance at RPMI Railpen Investments, explained: “From an investor perspective, the key is reducing risk; operating risk for oil, gas and mining companies who face potential unrest—even violence—from a populace that sees little benefit from its mineral wealth; commercial risk from the threat of contracts being torn up on the back of resource nationalism; and market risk from volatility in commodities prices, which is exacerbated by social unrest.

“The less mystery there is behind these resource deals, the fewer unpleasant surprises we can expect.”

Arne Lööw, head of corporate governance at AP4, added: “This move by Canada is critical for achieving a consistent global transparency standard. As one of the world’s top listing venues for mining stocks, it needs to take its rightful place at the top table by setting a meaningful standard in line with the US and EU.

“We don’t want companies evading tough standards by shopping around for the weakest forum and picking Canada. The fact is that Canada’s own mining industry leaders have broken the mould by calling for this: they are the first to recognise the value to industry of transparent business practice, and we agree.”