Advisors Question Hedge Fund Fee Structure

In light of CalPERS’ recent pullback from hedge funds, scores of investment consultants are coming out of the woodwork advocating for changes to the “2 and 20” fee structure traditionally used by hedge funds.

Towers Watson research chief Damien Loveday told the Wall Street Journal yesterday:

“We believe a better way of tackling fees is by assessing the skill managers offer to clients, rather than paying for market-based returns. ‘Two and 20’ should not be the norm.”

Kerrin Rosenberg, an executive at the consulting firm Cardano, shared the sentiment:

“If ever there was a moment to get rid of ‘two and 20’ forever, this is it.” He backed Towers Watson’s initiative, noting that many hedge funds were out to survive, rather than prosper.

Just because consultants think one way doesn’t mean pension funds will think the same. But it’s important to note that these firms frequently advise pension funds on investment decisions—so it’s safe to say the funds are hearing the same anti-fee sentiment that we are.

Last week, a major Dutch pension fund shut out hedge funds and cited one reason: the fees. From the Wall Street Journal:

Last week, PMT, the Dutch pension fund with €56 billion ($71.7 billion) under management, said it would close its €1 billion hedge fund portfolio, adding that although hedge funds were only about 2% of assets, they collected 32% of the investment fees it paid.

A spokeswoman for the fund said: “The hedge fund investments were expensive if you relate the cost to what the funds delivered. We found that we did earn from hedge funds, but we did not earn enough versus the risks and the costs.”

To be fair, it seems hedge funds have budged just a bit from the “2 and 20” scheme. According to Preqin data, fees have fallen to around 1.5 percent of assets and 18.7 percent of performance.