| Management fees lower for fund-of-hedge funds, stable for traditional assets |
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| 24/03/2008 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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In an environment of lower expected returns, management fee levels across traditional asset classes have remained broadly stable. However, in a number of categories, including global tactical asset allocation (GTAA), commodities, currencies and fund of hedge funds (FOHFs), 2007 saw a significant drop in fees compared to the previous year. The results, which are based on 77 requests for proposals (RFPs) by bfinance, reflect a growing appetite among investors in favour of diversification and less constrained strategies. The number of FOHF RFPs represented 10.3% of the proposals. There were three GTAA RFPs in 2007 compared to only one in 2006. Appetite for less plain vanilla products remained strong, with long/short equity and long/short fixed-income RFPs making their debut at a time of heightened market volatility. Including alternatives, the most expensive asset classes in the survey was GTAA, fixed-income long-short, emerging markets equity, Eurasia Far East (EAFE) fund of hedge funds and active currency. Of the three GTAA mandates, the highest average fee paid was 131bps, while the lowest was 107bps. Worthwhile alpha The average fee for a €82m EAFE FOHF mandate was 126bps. FOHF fees fell into a range of 100bps and 135bps. In the enhanced money market segment, the lowest average fee paid was 15bps for a €1bn deal, while the highest was 147bps for a €250m mandate. The survey does not include performance-based fees for alpha seeking mandates for which there seems to be strong interest. "It is worthwhile to find alpha," says Tony Watson, Chairman of Marks & Spencer's €7bn pension scheme, which is looking to make a 5% investment in hedge funds this year. "It is also worthwhile to pay for it." Fees were highest in asset classes where managers have the most potential to outperform. Yet FOHFs, GTAA and commodity RFPs posted on average the largest year-on-year drop in fees. These figures do not include performance fees which can be quite hefty. "The drop in management fees may reflect heightened competition and more institutional funds being committed to specialised, alpha-seeking strategies," says Olivier Cassin, Head of Research and Development at bfinance. The average FOHF fee in 2007 was 107bps compared to 123bps in the previous year. The average GTAA fee in 2006 (there was only one) was 145bps compared to 121bps in 2007. Looking at commodities, fees dropped from 106bps the previous year to 76bps. The average fee for currencies decreased from 106bps to 100bps over the same period. Emerging markets The most expensive asset category in equities was emerging markets. It posted average fees of 94bps, an increase of 9bps from 2006. Geographically, the most expensive deals involved global mandates (64bps), followed by UK (57bps), US (56bps) and Europe (51bps). The fee for a €450m Japanese equity deal was 49bps. Meanwhile, a separate €42m deal in the same group had an average fee of 72bps. The lowest fee paid was 14bps for a currency overlay mandate compared to 22bps in 2006. It is generally the case that as an asset class, equity is more expensive to manage than bonds and that international equity and specialty investments carry higher costs than domestic equity. The survey results are consistent with this, even though fees for alpha mandates and a number of alternatives have been declining year-on-year as the table indicates. Equity is thought to be more expensive to manage because of the increased research costs associated with picking stocks, while asset managers specialising in international securities are thought to incur additional associated costs above the level of domestic equities because of the increased difficulty in researching international companies. International equities may include emerging market equity which can be more costly to trade due to lower liquidity than developed markets. In addition, asset managers tend to charge additional performance fees for alpha-generating strategies. Some of the increased cost results from the need to review and understand foreign accounting statements and to obtain company information not required to be disclosed under foreign securities laws. Custody costs also tend to be higher for international assets. This may help explain why emerging market equities had the highest average fee in the equity category. Alpha or the ability of a manager to deliver returns above the market will likely attract more pension funds to invest in less plain vanilla strategies in the future. The second driver in this trend is diversification and the increase in our GTAA and FOHF RFPs in 2007 are indications of such a shift. The latest developments in the enlargement of the investment universe for GTAA are active strategies venturing into such areas as individual commodities, including copper, oil, silver and corn. Other relatively new strategies take long and short positions on volatility with the use of futures on VIX and the VDAX, which are indexes on implied volatility of the S&P 500 and DAX indexes. Of note in the survey is the increase in long/short strategies compared to previous years and the fees investors are prepared to pay for them (ABS long/short had an average fee of 116bps) to take advantage of the heightened volatility characteristic of today's markets.
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Articles of the same Topic : Fees
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