Massachusetts PRIM’s senior investment officer talked to Bloomberg BNA this week about the board’s success using managed accounts to change the landscape of its hedge fund portfolio.
Among the benefits: lower fees and greater transparency. From BNA:
Hedge Fund Transparency
[…] Managed accounts provide full transparency over what a hedge fund is doing with PRIM’s investments, said Nierenberg.
This enables PRIM, which has about $6 billion—or about 9 percent of its assets—in hedge funds and related investments, to “see in virtually real time” whether a hedge fund has been doing what it was hired to do.
PRIM may learn, for instance, that it needs to “fill in the gap” with other investments to account for what the hedge fund hasn’t been investing in, he said. Such transparency allows PRIM to accurately know how much risk exposure it has at any given time.
Negotiating Lower Fees
Many investors, including public plan trustees, have been concerned about the high fees charged by hedge funds, which commonly charge 2 percent in fees in addition to 20 percent of the hedge fund’s gains.
Nierenberg said that PRIM has been able to keep fees down by negotiating fee structures that are much lower than those typically charged to commingled account investors.
He said that the typical fee structure assessed in commingled arrangements may give way to something more like a 1 percent management fee and a 10 percent of gain carry. “Both the management fee and the carry are separate forms of manager compensation that can be negotiated,” he said.
In addition, Nierenberg said that PRIM has negotiated lower fees by customizing the services it gets in its managed accounts. For example, sometimes expenses that should be absorbed by the fund will get passed on to commingled account investors, he said. In managed accounts, the PRIM can negotiate the specific expenses that it will pay for, he said.