“1 or 30″ Fee Structure Gains Steam in Asia

Last month, hedge fund Albourne Partners revealed in a white paper a new fee structure it had been working on with the Texas Teachers’ pension fund.

It’s unclear how the “1 or 30″ structure will catch on in the U.S.; but it’s already gaining steam in Asia.

Institutional Investor explains the structure:

1 or 30 is designed to ensure that the investor gets 70 percent of the economics from its hedge fund investment, while recognizing the need to pay a performance fee to asset managers in lean times. Under the proposed fee model, the management fee gets paid back through a discount to the performance fees (applied over time if the hedge fund fails to perform in any given year), and Texas will pay performance fees only after reaching an agreed-upon hurdle rate. The maximum that a manager can make is 30 percent of the alpha, or performance after the benchmark, minus the one percent management fee.

The simplest way to consistently meet an investor’s 70% alpha share objective would be a fee structure with no management fee and a 30% performance fee, paid only on alpha. Such a fee structure, however, could result in significant business risk to the manager during any prolonged period of underperformance as there could be long periods without any certain revenue for the manager from either management or performance fees, wrote Albourne portfolio analyst Jonathan Koerner in the paper. To eliminate this risk, 1 or 30 structure guarantees regular management fee income to the manager on a consistent ongoing basis, identical to current traditional management fee mechanics. A reduction of the same amount is then made to the performance fee to return total fees to equilibrium at 30% of alpha.

In Hong Kong, at least two hedge funds are implementing the “1 or 30″ model. According to Albourne, over two dozen managers globally are adopting the structure.

From Bloomberg:

As investors worldwide are balking 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 percent of assets in management fees and 20 percent of profits.

Myriad, which manages more than $4.1 billion, is adding a new share class in its hedge fund that charges the greater of a 30 percent cut of profits or 1 percent of assets under management to better align its interests with those of investors, said a person with knowledge of the matter. Ortus in July started a fund that takes a 33 percent share of profits without charging any management fee, according to a newsletter to investors obtained by Bloomberg.

[…]

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 to the industry in the fourth quarter, according to Jonathan Koerner of Albourne Partners, which advises clients on more than $400 billion of alternative investments globally.