The manager of BH Global, the investment trust Questor tipped last year, has handed the board an extraordinary ultimatum, threatening to quit unless its fees are doubled.
Should Brevan Howard succeed in its demand, the trust’s management fee would jump from 1pc to 2pc. That’s on top of an existing performance fee entitling the hedge fund manager to 20pc of any rise in the trust’s net asset value.
OK, if you can get it why not charge it. But the reason given:
So what makes Brevan Howard think it can buck this trend? As the fund manager puts it in its letter to the board, “exceptional performance”.
The fund group is attempting to renegotiate its fees after a renaissance in its investment returns.
Ah, no, if you’ve just made 27% for the investors then you’ve just been paid 20% of 27%, haven;t you? So your performance is rewarded. So that’s not a justification for a doubling of your flat fee of assets, is it?
The cynical would think as follows. Hedge fund performance reverts to the mean, a good year is often enough followed by a bad. So, use the good year to double the fees you’ll receive even in a bad one.
Well, if you can manage it then good luck to you but there’s no particular reason why people should believe your reasoning.
It would be interesting to see the balance of beta between standard investment vehicles and hedge funds. My bet is that hedgies love high beta stocks.
If the portfolio goes up 30%, down 27%, up 30%, down… you get the picture. Investors would be out the standard fee on a standard fund, but out a lot in a hedge fund. 20% of 30% would be transferred to the managers every other year, for no long term out-performance at all for all the assumed risk and volatility.
So does the contract state that the fund managers have to pay the fund 20% of any losses? Thought not.
I don’t know about BH, but the typical hedge fund will have a “high water mark” performance fee – the managers get 20% of the profits, but only of those above the fund’s previous peak unit value.
This still means that losses are not shared, and risky investing is encouraged, but it is not quite as crazy as rewarding managers just for taking the unit value down form 100 to 80 and then back up to 100.
‘2 & 20’ is a standard Hedge Fund fee. Although the ‘2’ has come under pressure. The 20% only applies over the agreed ‘hurdle rate’, which can be anything from a 5% to a 15% return.
I run a retail FS business. We run client money based on very low fee evidence based funds. We have generally obtained higher returns for less risk than the index of hedge funds on a like for like basis. I consider most of them rackets only enabled by ludicrous money printing, financial repression and negative interest rates. Without all that cronyistic state, government and bureaucratic failure with (MY) money and credit most would die on the vine.