So what do I think of the 'Towers Watson approach' to negotiating down hedge fund fees? Not much. If they are able to, anyone with size and brains is negotiating down fees on all alternative investments, not just hedge funds. It makes perfect sense and with an expected $80 billion flowing into hedge funds in 2012, following the great hedge fund humbling of 2011, many institutions will be taking a closer look at their hedge fund allocations:
Chris Ford, head of European investment consulting at Towers Watson, said: “We are not prepared to go along with the traditional hedge fund fee structure of 2% and 20%.”
He said Towers had achieved fee savings of between 30% and 40% after negotiating discounts and using cheaper alternatives, including some of its own design.
Ford said his firm had taken advantage of bulk buying. He said: “We now manage $50bn on a fiduciary basis, of which a large proportion involves investment in hedge funds. We have been investing an average of $1bn a year in the sector.”
Around 20% of total assets managed by Towers comprises hedge funds. It also advises several large institutions interested in boosting their allocations.
Hedge funds are desperate to win this business now that flows into funds of hedge funds have dried up and private individuals are investing less.
According to a report published by prime broker Barclays Capital, two thirds of flows into hedge funds, expected to total $80bn this year, will come from institutions, adept at negotiating fee discounts.
Richard Watkins, chief executive of Liability Solutions, said: “You can get such fee reductions from a number of funds, particularly if size is large, liquidity is less and managers are nervous.”
He said, however, it could become harder to secure discounts this year, assuming fund flows improve.
Investors may add about $80 billion of new capital to hedge funds globally this year, the most since 2007, Barclays Plc (BARC) said in a report.
About 56 percent of investors surveyed by Barclays plan to increase such investments in the coming year, more than seven times the number that plan to reduce their allocations, the U.K. bank said in an e-mailed statement dated Jan. 13. Endowments, foundations, private banks and public pensions will most likely be the sources of new capital to the industry, it said.
This year “has the potential to be the most significant year for new capital allocations to hedge funds since 2007,” Ajay Nagpal, Barclay’s head of prime services, said in the statement.
Barclays is projecting an increase in inflows after the hedge fund industry globally posted the second-worst annual performance on record in 2011. Eurekahedge Hedge Fund Index (EHFI251) declined 4 percent last year, according to preliminary data.
Investors may also reallocate about $300 billion of existing investments to hedge funds within the same strategies or across strategies, Barclays said.
Global macro and systematic and volatility funds may be the biggest recipients of new capital as investors look to allocate money to short-term traders with lower correlation to stock markets, it said. Macro funds bet on broad economic trends by investing in commodities, currencies to stocks and bonds. Volatility funds seek to profit from market swings.
Investors will most likely reallocate their capital within equity and credit strategies as they try to redeem out of poor performers and prefer for more specialized products, it said.
In terms of size of the funds, investors will continue to increasingly put more money into hedge funds with less than $1 billion of assets this year, Barclays said. Smaller funds already doubled their share of the net industry inflows to 18 percent last year over 2010, it said.
“Smaller managers are frequently seen by investors to be more agile in adapting their existing strategies to generate alpha,” said Louis Molinari, head of capital solutions within Barclays’ prime services division. ‘With the greater transparency and better fee and liquidity terms that many new and smaller funds offer, investors continue to gain confidence with investing in this segment of the hedge fund industry.”
Alpha is the premium an investment portfolio earns above a certain market benchmark such as the Standard & Poor’s 500 Index in the U.S.
The Barclays report was based on interviews and a survey of investors at a symposium in New York with about $4 trillion of assets under management, including $500 billion in hedge funds, or a quarter of industry assets, it said in the statement.
Too bad Barclays didn't invite me to this "hedge fund symposium". I would have set those poor institutional schmucks straight on the their hedge fund investments. I am glad to see that smaller funds are getting more of the pie but will repeat, most hedge funds -- big or small -- are mediocre, hyped up, marketing machines who sell beta as alpha. They are not worth 2 & 20; hell, most of them are not worth a few basis points, the cost of swapping into any (beta) index!
And it's high time institutional investors start seeding hedge funds, not just in New York, London, and Chicago, but all around the world, including right here in Canada. If you do it properly, focusing on liquid strategies, using a robust managed account platform, not only will you get lower fees and better performance, you will build a solid, long-term relationship, gaining important knowledge leverage. Do not underestimate knowledge leverage with your external partners.
With talk of Morgan Stanley limiting bonuses, there will be plenty of prop traders looking to go off on their own. A lot of guys and gals sick and tired of the politics and crap at the big banks are going to want to venture off on their own. Some will succeed, most won't, but the good ones deserve a fair shot.
And now the Managed Funds Association (MFA) is petitioning the US Securities and Exchange Commission (SEC) to eliminate the ban on general solicitation and advertising with respect to hedge funds:
Hedge fund lobbyists have petitioned the US Securities and Exchange Commission to repeal the rule that lies behind one of the industry’s most notorious traits: its secrecy.
The Managed Funds Association, which counts George Soros, John Paulson and Louis Bacon as members of its founding council, has implored the SEC to eliminate rule 502(c) of Regulation D – an arcane piece of Depression-era legislation that defines how the modern hedge fund industry operates.
The rule officially prohibits all general advertising and solicitation by hedge funds. But it is so broadly defined that it means most do not communicate with unqualified outsiders, especially the press, at all.
Investors in hedge funds themselves have long complained about the regulations. The restrictions on information have long meant it is not only hard to find out about new funds to invest in, but also that it is difficult to find out whether fund managers are providing accurate information to all their investors.
A generic e-mail address on a white web page is the extent of the public presence for the $32bn Brevan Howard, for example – a firm which is believed by many to be one of the global bond markets’ most influential traders.
Indeed, of the 20 largest hedge funds worldwide, which manage assets of more than $500bn between them, only two – Man Group and Och-Ziff – have websites that give, like Brevan, anything more than the most basic information. And Man and Och-Ziff are large publicly listed companies.
“We urge the Commission to eliminate the prohibition on general solicitation and advertising in Regulation D under the Securities Act of 1933,” Richard Baker, the MFA’s President and former US congressman said in a letter sent to the SEC earlier this month. “Private funds and regulatory oversight of the industry in particular would be unrecognisable to the original drafters of Regulation D.
“Managers generally take a cautious approach and strictly limit all types of communications about their business,” Mr Baker noted. “For example, private fund managers generally will not respond to press enquiries, even to correct inaccurate reports.”
The regulation D rules were designed to restrict the ability of private fund managers to push supposedly higher risk products to unsuitable audiences in the wake of the 1929 Wall Street crash.
The MFA said it had long believed the rules to be redundant.
A separate set of regulations in the US Investment Company Act effectively restricts investment in hedge funds to “qualified purchasers” – individuals with more than $5m in investments or companies with more than $25m.
“We hope this will take some of the mystery out of things and get rid of the legal complexity associated with marketing. We believe it is the appropriate time for these rules to change and the industry wants to be more transparent,” said Stuart Kaswell, the MFA’s general counsel.
There is too much complexity in marketing hedge funds in the US and in Europe. If it were up to me, I would introduce a law stating that all institutional investors need to use a managed account platform to invest in hedge funds. And I would standardize all marketing material of hedge funds so that those peddling pure snake oil would be forced to reveal that they are nothing but hype, overpaid hedge fund managers selling alpha as beta.
What about less liquid hedge fund strategies that do not lend themselves well to a managed account platform? After all, the flip side of transparency is liquidity. No problem, set up a group in your private equity/ hedge fund department that focuses on those strategies but make sure you have transparency. When it comes to hedge funds, always make sure you have transparency. If you don't, you'll get massacred.
Having said all this, I recognize there are many well known hedge funds that are fussy about providing transparency. They're afraid someone will replicate their 'quantitative algorithm' and steal the secrets of their trade. My response to these ultra secret funds is simple: if it's that easy to replicate, it ain't true alpha.
Below, Lincoln Ellis, Strategic Financial Group, provides a futures trader's perspective on today's strong open and David Kelly, JPMorgan Funds, discusses why the U.S. market is shrugging off S&P downgrades of nine European countries and the eurozone bailout fund. As I stated, if we get passed this crucial week in Greece, get ready for La Dolce Beta. It will be 'RISK ON' all the way.