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Hedgies face unhappy clients

In Financial competency on 17/06/2016 at 1:34 pm

From NYT Dealbook

HEDGE FUND MANAGERS TRY TO STANCH LOSS OF INVESTORS Hedge fund titans may be used to running their firms like elite clubs, but years of poor performance have forced them to open up admission, Alexandra Stevenson reports in DealBook.

More big-name investors like MetLife and American International Group have begun to withdraw their money from hedge funds and the investors who stay get a chance to sit dictate lower fees and better terms.

Hedge funds can no longer just operate on a “2 and 20” model, where investors pay fees of 2 percent of assets under management and 20 percent of any gain in any year. Managers are offering lower fees for investors to keep their money in funds and setting performance targets where investors would pay a fee only if they were exceeded. And the favorable terms are not just offered to longtime loyal clients.

The industry argued that a hedge fund manager’s job was to protect in down years and not outperform in good years, but when hedge fund returns fell with the markets last summer, the point was moot. Some of the best-known managers, including William A. Ackman of Pershing Square Capital Management and Larry Robbins of Glenview Capital Management, have lost money.

And for some investors, acknowledgement of poor performance is not enough. In September 2014, the California Public Employees’ Retirement System announced plans to liquidate its $4 billion hedge fund holdings because of concerns that the investment were too expensive and complicated. In April, the pension fund for New York City civil employees voted to exit its portfolio of $1.5 billion in hedge fund investments. Altogether, investors pulled $15.1 billion from the industry in the first quarter of the year – still a drop in the ocean compared with the $2.9 trillion the industry managers, but the pressure is mounting.

Mr. Robbins apologized to investors recently in an effort to stem the outflow of investor money from his firm. He pledged to “right the ship as quickly as possible” and offered the opportunity to put more money into a new fund that would waive fees. He has continued to lose money – investors in his flagship fund had lost 6.5 percent at the end of May – so he is now offering more favorable redemption terms, allowing existing investors that add more money into the fund to step into the shoes of investors who have left.

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