Asian hedge funds move away from 2-and-20 fee model

Two HK hedge funds craft alternatives to industry practice that charges hefty fees

HONG KONG • The hedge fund industry's shift away from the much- maligned 2-and-20 fee model is gathering steam in Asia.

As investors worldwide are baulking at hefty fees, Hong Kong hedge funds Myriad Asset Management and Ortus Capital Management are crafting alternatives that mark a radical departure from the industry practice of charging 2 per cent of assets in management fees and 20 per cent of profits.

Myriad, which manages more than US$4.1 billion (S$5.86 billion), is adding a new share class in its hedge fund that charges the greater of a 30 per cent cut of profits or 1 per cent of assets under management to better align its interests with those of investors, said a person with knowledge of the matter.

Last July, Ortus started a fund that takes a 33 per cent share of profits without charging any management fee, according to a newsletter to investors obtained by Bloomberg.

"Asia funds have typically and historically been slower at responding to changes in new or innovative fee or liquidity structures," said Mr Hugh Abdullah, Morgan Stanley's head of hedge fund capital introductions for Asia.

Investors pulled US$106 billion (S$151 billion) out of the US$3 trillion hedge fund industry last year, the largest annual outflows since 2009.

That's changing as "they may face investor pressure or demand, have a desire to take a strategic direction for their business, given where they foresee the industry is heading, or they may have a view on what ultimately is equitable".

There's been widespread investor backlash against hedge funds after years of lacklustre returns.

The HFRI Fund-Weighted Composite Index gained 5.5 per cent last year, trailing the 7 per cent to 8 per cent return targeted by most US pension funds - a major source of industry capital - for the third straight year.

Investors pulled US$106 billion out of the US$3 trillion hedge fund industry last year, the largest annual outflows since 2009, according to data provider eVestment.

Globally, at least two dozen "well-known" managers with institutional investors have either adopted or are working on a so-called "1-or-30" fee model that was introduced in the fourth quarter, according to Mr Jonathan Koerner of Albourne Partners.

Last September, global manager Brevan Howard Asset Management said it would stop charging management fees on new capital committed by existing clients to two of its funds.

Mr Koerner said, referring to returns in excess of a market benchmark: "The objective of 1-or-30 is to more consistently ensure that the investor retains 70 per cent of alpha generated for its investment in a hedge fund."

The "1-or-30" model allows managers to take home the greater of a 1 per cent management fee or a 30 per cent cut of gains in excess of a benchmark.

BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on January 20, 2017, with the headline 'Asian hedge funds move away from 2-and-20 fee model'. Print Edition | Subscribe