3 hedge funds give up old fee model

Three Asian hedge fund start-ups are eschewing the industry's traditional fee model as they vie for capital from investors that have become increasingly reluctant to put money with unproven managers.

Kit Trading Fund, Noviscient and Gordian Capital Singapore are among firms that are starting to do away with the 2 per cent management fee and 20 per cent of all profits - also known as the 2-and-20 model.

Noviscient plans to start a fund that will charge investors no management fees and will absorb the first 5 per cent of annual investment losses, moves almost unheard of in an industry known for levying the highest fees in the money management business.

Gordian will take a performance fee only if returns exceed a certain benchmark. Kit Trading also has lower-than-average fees, while insulating clients from some declines.

"Increasingly these days, hedge fund start-ups have to come up with innovative fee structures in order to attract capital and achieve critical mass," said Prof Melvyn Teo, professor of finance at Singapore Management University.

"The key is to protect investors from some of the downside while still ensuring that the manager shares enough of the upside so that the business remains viable and attractive to the manager."

Hedge funds have been facing an investor revolt over high fees after years of lacklustre returns, drawing criticism from some of the top names in finance.

Billionaire investor Warren Buffett last month estimated in his annual letter to Berkshire Hathaway shareholders that investors wasted more than US$100 billion (S$140 billion) on high-fee money managers over the past decade.

While fledgling firms are typically the most flexible when it comes to fees, even well-established managers are making more concessions under pressure from investors.

Winton, Caxton Associates and Tudor Investment are among hedge funds that have cut fees as investors pulled the most money from the industry last year since the global financial crisis. Returns from hedge funds globally have failed to keep pace with the broader market since the global financial crisis.

While many hedge funds do not necessarily aim to beat stocks, muted returns have made it hard for managers to justify their high fees.

Investors added US$7.9 billion to the global hedge fund industry last month, breaking a five-month streak of withdrawals, according to data tracker eVestment.

"There is a widespread feeling that the traditional hedge fund model, where investors bear the losses and share the gains, no longer works," Mr Michael Downer, who leads Kit Trading Fund, said.

"Our job is to better align investor interest with that of managers."

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A version of this article appeared in the print edition of The Straits Times on March 25, 2017, with the headline '3 hedge funds give up old fee model'. Print Edition | Subscribe