Breaking the Trend to Higher Fees
Breaking the Trend to Higher Fees
Will Hedge-Fund IndustryFollow U.K. Firm as It CutsWhat It Charges Clients?
By DAVID REILLY Staff Reporter of THE WALL STREET JOURNALFebruary 22, 2005; Page C3
LONDON -- Activist United Kingdom fund manager Hermes Pensions Management Ltd. is bucking the trend toward ever-higher fees for products investing in hedge funds, a move that could put downward pressure on fees in the wider hedge-fund industry.
Hermes is owned by the BT Pension Scheme and manages the £29 billion ($55 billion) retirement fund of BT Group PLC's British Telecommunications, the country's largest such fund. In November, Hermes launched a "fund of hedge funds" -- a product that combines investments in individual hedge funds much in the way a mutual fund pools stocks -- that it plans to offer to other pension funds.
Hermes will charge a management fee of 0.6% of assets under management, says James Walsh, the firm's head of strategy. That is far below the annual management fee of 1% to 2% of assets typically charged by funds-of-hedge-funds. Hedge funds are private investment partnerships that make bets on stocks, currencies and other global markets, often with borrowed money.
Hermes also will charge a performance fee of 10%, but that charge kicks in only if the product's performance tops a hurdle, the London interbank offered rate plus 3.5%. Most funds-of-hedge-funds charge performance fees of 5% to 20% of profits. Traditional funds of funds typically don't face such a hurdle, although they must usually top previous highs, known as high-water marks, before performance fees kick in. The fees charged by such funds come on top of already lofty fees often charged by the underlying hedge funds, which can include management fees of 1% to 5% and performance fees of 10% to in some cases 40%.
"We're doing something different on fees because, as investment advisers to the BT scheme, we had to say 'What do we think is appropriate?' and we had to justify them to the trustees," Mr. Walsh says. "It would be nice to think at the same time we can help change the market."
So far, Hermes hasn't formally marketed the hedge-fund product to outside investors and is still busy deploying the £540 million committed by the BT pension fund. But earlier this month, Hermes signed its first outside customer, the £2.7 billion South Yorkshire Pension Fund, says Mr. Walsh, who set up the fund-of-funds operation. He declined to detail the investment from South Yorkshire, which already invests with Hermes. In a statement, the South Yorkshire pension fund said it was attracted by the fund-of-funds charges, "which are substantially lower than the industry norm." Hermes expects to actively seek outside investors starting this summer.
Some rivals acknowledge the move on pricing, combined with a lackluster 2004 for many hedge funds, could pressure fees, because Hermes is well-known among pension funds. Besides the BT fund, Hermes also manages the £16.4 billion Royal Mail Group PLC's pension plan and about £4 billion in outside pension money, including funds from the California Public Employees' Retirement System and the Ontario Teachers' Pension Plan.
"Hermes are coming in at a competitive level," says Stephen Oxley, managing director in Europe for California-based fund-of-hedge-funds manager Pacific Alternative Asset Management Co.. "It may mean they will pick up business from those clients who are more fee-sensitive."
Still, he thinks performance remains critical over fees, because investors acknowledge that "for a good fund-of-hedge-funds you pay what you need to pay," says Mr. Oxley. Paamco -- which manages globally about $7 billion -- charges a 1% management fee and 5% performance fee.
And with investors flocking to hedge funds, so far there is little call to lower fees. While critics of fund-of-fund products say the extra layer of charges eats into returns, the products have proven popular with pension funds, because they potentially shield an investor from a blow-up at a single hedge fund. Big funds-of-hedge-funds now account for nearly half the nearly $1 trillion invested in hedge funds, according to a survey released earlier this month by industry publication InvestHedge.
Because of the proliferation, Hermes risks being just another face in an already crowded market as banks and traditional asset managers all look to start fund-of-hedge-fund products of their own.
"To us, they're just another entrant," says Omar Kodmani, senior executive officer in Europe for Permal Asset Management Inc., one of the world's biggest fund-of-funds operations with about $16.3 billion in assets. Permal generally charges an annual management fee of 2% with no performance fee. Hermes's fees will "be another point of reference that potential clients might want to point to," Mr. Kodmani says, "but even that price will only be worth it if the net return is going to be there."
Write to David Reilly at david.reilly@wsj.com1
Will Hedge-Fund IndustryFollow U.K. Firm as It CutsWhat It Charges Clients?
By DAVID REILLY Staff Reporter of THE WALL STREET JOURNALFebruary 22, 2005; Page C3
LONDON -- Activist United Kingdom fund manager Hermes Pensions Management Ltd. is bucking the trend toward ever-higher fees for products investing in hedge funds, a move that could put downward pressure on fees in the wider hedge-fund industry.
Hermes is owned by the BT Pension Scheme and manages the £29 billion ($55 billion) retirement fund of BT Group PLC's British Telecommunications, the country's largest such fund. In November, Hermes launched a "fund of hedge funds" -- a product that combines investments in individual hedge funds much in the way a mutual fund pools stocks -- that it plans to offer to other pension funds.
Hermes will charge a management fee of 0.6% of assets under management, says James Walsh, the firm's head of strategy. That is far below the annual management fee of 1% to 2% of assets typically charged by funds-of-hedge-funds. Hedge funds are private investment partnerships that make bets on stocks, currencies and other global markets, often with borrowed money.
Hermes also will charge a performance fee of 10%, but that charge kicks in only if the product's performance tops a hurdle, the London interbank offered rate plus 3.5%. Most funds-of-hedge-funds charge performance fees of 5% to 20% of profits. Traditional funds of funds typically don't face such a hurdle, although they must usually top previous highs, known as high-water marks, before performance fees kick in. The fees charged by such funds come on top of already lofty fees often charged by the underlying hedge funds, which can include management fees of 1% to 5% and performance fees of 10% to in some cases 40%.
"We're doing something different on fees because, as investment advisers to the BT scheme, we had to say 'What do we think is appropriate?' and we had to justify them to the trustees," Mr. Walsh says. "It would be nice to think at the same time we can help change the market."
So far, Hermes hasn't formally marketed the hedge-fund product to outside investors and is still busy deploying the £540 million committed by the BT pension fund. But earlier this month, Hermes signed its first outside customer, the £2.7 billion South Yorkshire Pension Fund, says Mr. Walsh, who set up the fund-of-funds operation. He declined to detail the investment from South Yorkshire, which already invests with Hermes. In a statement, the South Yorkshire pension fund said it was attracted by the fund-of-funds charges, "which are substantially lower than the industry norm." Hermes expects to actively seek outside investors starting this summer.
Some rivals acknowledge the move on pricing, combined with a lackluster 2004 for many hedge funds, could pressure fees, because Hermes is well-known among pension funds. Besides the BT fund, Hermes also manages the £16.4 billion Royal Mail Group PLC's pension plan and about £4 billion in outside pension money, including funds from the California Public Employees' Retirement System and the Ontario Teachers' Pension Plan.
"Hermes are coming in at a competitive level," says Stephen Oxley, managing director in Europe for California-based fund-of-hedge-funds manager Pacific Alternative Asset Management Co.. "It may mean they will pick up business from those clients who are more fee-sensitive."
Still, he thinks performance remains critical over fees, because investors acknowledge that "for a good fund-of-hedge-funds you pay what you need to pay," says Mr. Oxley. Paamco -- which manages globally about $7 billion -- charges a 1% management fee and 5% performance fee.
And with investors flocking to hedge funds, so far there is little call to lower fees. While critics of fund-of-fund products say the extra layer of charges eats into returns, the products have proven popular with pension funds, because they potentially shield an investor from a blow-up at a single hedge fund. Big funds-of-hedge-funds now account for nearly half the nearly $1 trillion invested in hedge funds, according to a survey released earlier this month by industry publication InvestHedge.
Because of the proliferation, Hermes risks being just another face in an already crowded market as banks and traditional asset managers all look to start fund-of-hedge-fund products of their own.
"To us, they're just another entrant," says Omar Kodmani, senior executive officer in Europe for Permal Asset Management Inc., one of the world's biggest fund-of-funds operations with about $16.3 billion in assets. Permal generally charges an annual management fee of 2% with no performance fee. Hermes's fees will "be another point of reference that potential clients might want to point to," Mr. Kodmani says, "but even that price will only be worth it if the net return is going to be there."
Write to David Reilly at david.reilly@wsj.com1
