Survey: Alternative Investment Fees on the Decline

(December 10, 2010) — Research by Mercer has shown what while asset management fees for hedge funds and real estate have decreased since 2008, fees have increased in long-only equity and fixed-income strategies.

With some increases observed in fixed income strategies and long-only equity, fees for traditional asset classes have varied. Mercer concluded that fees for hedge funds, private equity, infrastructure and real estate have all decreased. The study additionally reflects how pension plan sponsors or trustees of endowments or other types of institutional funds are evaluating managers’ investment returns after subtracting the fees that are charged for investment management, with some clients becoming increasingly aggressive in demanding lower fees to improve returns.

Terry A. Dennison, Mercer’s US director of consulting, believes the firm’s 2010 Asset Manager Fee Survey highlights how the financial crisis has created opportunities for fixed-income products and a continued following of liability-driven investing. “Fixed income was seen largely for stability, but after the financial crisis, there have been a lot of opportunistic investments in fixed income,” he told aiCIO. “In those countries where DB plans are moving more toward LDI, we’re seeing greater demand for fixed-income because it provides a liability matching and volatility hedging opportunity,” he said, noting that the typical fixed-income portfolio has become increasingly diverse, and thus some clients are willing to pay more in fees for potentially higher returns.

Strategies with lower fees since 2008 included eurozone fixed income, down an average of 7.2%; UK and European equity, 4.6%; US real estate, 4.5%; hedge funds/absolute return, 3.2%; and Japan equity, 1.7%. Meanwhile, strategies that increased fees included Australia fixed income and New Zealand equity, both up 10.9%; eurozone equity, 6.3%; UK equity, 4.7%; and global equity, 2.8%.

“The impact of the financial crisis continues to be felt by companies and investors,” said Divyesh Hindocha, Global Director of Consulting for Mercer’s Investment Consulting business, in a statement. “Although not universal, subdued investment returns have taken the edge off many alternative asset products. Combined with an increased focus on operational costs this trend has put growing pressure on asset managers to reduce the complexity of their products and lower their fees in the pricey alternatives arena.” He added that Mercer believe there is room for further simplification and larger reductions in the overall fees charged by asset managers.

Mercer’s fee survey focused on asset managers is the firm’s fourth biannual report analyzing fee data on more than 20,000 asset management products from over 4,000 investment management firms. The survey covers asset managers in a range of geographies and across numerous products including pooled and separately managed accounts.

Among traditional asset classes, small cap equity continued to be expensive with fees averaging 0.89%, while global emerging markets equity remained the most expensive, with median fees averaging about 1% up from 0.90% in 2008. According to the report, when comparing the data by regions Canada is the least costly, with average fees of around 0.3%. The UK and Australia follow with average fees of 0.46% and 0.47% respectively. Emerging markets remains the most expensive, at around 0.87%, with Asia-Pacific a close second at 0.83%. Japan, Europe and US all range between 0.57% and 0.7%.