Justin Chin | Bloomberg |bergGetty Images
(click here to subscribe to the new Delivering Alpha newsletter)
The previously unknown hedge fund known as White Square made headlines last week after the Financial Times reported the first death among those shorting GameStop.
But betting on GameStop isn̵7;t death for White Square. In fact, its performance has just rebounded.
As White Square puts it in its closing letter: “We have firsthand experience. The trend shifts from hedge fund investments to cheaper alternatives.” The company noted that two investors redeemed and converted that capital to a cheaper passive or private equity fund.
White Square is not the first fund. And it certainly won’t be the last hedge fund fails to convince investors to pay for asset management. But the fees are inseparable for the hedge fund industry. as well as short selling and leverage. The fastest known hedge fund developed by AW Jones more than 70 years ago charges investors a 20% fee on actual profits. which was something new at that time A management fee of 2% of total assets. was added later This makes structures 2 and 20 popular.
in the past few years Average Fees Decline According to HFR in the fourth quarter of 2020, hedge funds charge an average 1.4% management fee and 16.4% performance fee, down from the 1.6% management fee and 19% performance fee, which is common. a decade ago
However, a recent Ohio State University study looked at what they called the “Effective incentive fees,” which researchers say are nearly 50%, not 20% as often advertised.
When factoring factors such as exit decisions and losers across funds The researchers found that limited partnerships in hedge funds offer far more fees as a percentage of their profits. For example, if funds are redeemed from a losing fund—but it was a fund that generated previous returns and charged an incentive fee— Payouts to general partners as a percentage of gross profit will be higher.
After the management fee has been deducted The results of the study concluded that limited partnerships were paid as little as 36 cents for every Dollars earned on their investments
Christopher Ailman, chief investment officer at CalSTRS, the second largest public pension fund in the United States, said he believes the fee structure is “broken” rather than paying the usual price for access to hedge funds. Instead, he chose to model hedge funds with a cheaper, passive strategy.
“It’s a matter of structure and net return for us as long-term institutional investors,” Ailman said, “and if I can find a beta version of each of the underlying assets at a very low price. That’s my main foundation.”
As for the groan over hedge fund fees – a famous complaint that goes back decades – there are still plenty of investors willing to buy. Assets under management are near a record $3.8 trillion, according to HFR.
“Hedge funds are not for everyone,” said Brian Corbett, president and CEO of Managed Futures Association, a trade group advocating for Washington and elsewhere. for the alternative investment industry “But obviously there are key allocators who see it as an important part of the mix.”
Corbett said the way most deals are structured allows for alignment between the allocator and the hedge fund. The MFA launched an “education campaign” last week, addressing the “important role of hedge funds” for Americans. They argue that pension funds, colleges and nonprofits invest in hedge funds to increase wealth and protect it.
The public perception of hedge funds has been less than ever after the GameStop squeeze briefly, in which the industry faces a large number of retail investors seeking to force significant losses. important among those with bear market conditions.
“I’m not surprised to see all young people wanting to get an ounce of meat out of the hedge fund industry,” Ailman said. “I don’t think it’s going to get rid of hedge funds, but I think, you know, here. It’s a really interesting change. that we are seeing.”
Like this article?
for stock selection investment idea and CNBCNBC’s worldwide live broadcast.
subscribe CNBC Pro
Start your free trial now.