Pensions Should Follow the Leads of CalPERS and Utah Retirement Systems Over HF Fees

(August 23, 2010) — Pension schemes should push hedge funds to explain and justify their fee structures, research house Lipper has urged.

The firm is demanding that funds follow the leads of the California Public Employees Retirement System (CalPERS) and Utah Retirement Systems, which push hedge fund managers to explain their fee structures. “CalPERS announced in March 2009 its intent to work with hedge fund managers to restructure fees and relationships,” CalPERS spokesman Davis Wayne told ai5000. “We’ve cut about $56 million in fees with hedge fund managers this year – the bulk of fees cut this year — about $99 million — have been with hedge funds,” he said.

Meanwhile, Utah’s pension fund has urged its managers for ‘claw-back’ arrangements that permit investors to reclaim charges paid to funds that subsequently underperformed.

“Hedge funds have installed strong standards around transparency generally, and maybe that should be extended more fully to fees, as well,” said Ed Moisson, head of consulting at Lipper SMI, according to Global Pensions.

Hedge Fund Research revealed that the 2% management and 20% performance fees charged by hedge funds globally have been a steady source of debate since the funds posted a record 19% net loss in 2008, after having made fees on approximately10% gains in 2007. “Hedge funds commonly charge a management and incentive fee, but in contrast to the perception that these levels are standard across the industry at 2% and 20%, respectively, average management fees for single strategy funds were actually 1.58% as of the end of the first quarter of 2010; while average incentive fees were 19.12%,” Ken Heinz, president of Chicago-based Hedge Fund Research, Inc., told ai5000.“In some cases, newer funds are charging lower levels, while in others established managers are changing their fee structures.”

Lipper outlined 10 issues trustees should ask managers, which include:

1. What is the performance fee rate, and does this apply to total returns, or just net returns above a benchmark?

2. Is there a fixed hurdle rate or other benchmark, above which performance fees can be collected?

3. Is there a high water mark and what is its duration?

4. Is there a ‘claw-back’ mechanism?

5. Is there an equalization system?

6. How often is the performance fee crystallised for payment?

7. Is there a cap on fees?

8. Is there a penalty for underperformance?

9. Is there a quid pro quo for lock-up arrangements, such as lower fees?

10. Is there a redemption penalty, and what is the redemption notice period?