The fee structure that refuses to die

From COOConnect: “A lunch I enjoyed with senior investment bankers at a then-leading prime broker in the summer of 2007 has remained in my mind. During the course of it, I was shown a spider chart which proved that, far from declining, the fees charged to investors by their hedge fund clients were actually going up. Yet even in 2007 this was counter-intuitive: there was at the time a growing chorus of complaint about the 2 and 20 fee structure. Indeed, almost exactly five years before Simon Lack published The Hedge Fund Mirage, Mark Kritzman of the Sloan School at MIT was arguing in a learned journal in February 2007 that fees ate half the returns of a hypothetical hedge fund portfolio….

“So it was fascinating to read in the latest Goldman Sachs survey of hedge fund investors the observation that 83 per cent of the monies invested by the respondents in 2012 were made at full rather than individually negotiated fees.  Even pension funds, whose opposition to paying full fees is most ostentatious, told Goldman that 68 per cent of the monies they invested in 2012 were made at full or non-negotiated fees.

“In other words, the negotiations on fees charged by hedge fund managers seem to have taken place along remarkably old-fashioned lines, in which the ability or otherwise of a manager to out-perform was relatively unimportant – certainly by comparison with the size of the cheque the investor was prepared to write, or the prospect of outlandish returns….

Read all about it at http://cooconnect.com/news/fee-structure-refuses-die