There seems to be a wide mismatch between the expectations of asset managers and pension funds on the issue of trading liquidity for lower fees. Yet there are clear signs that asset managers are also responding swiftly to investor demands. Renaissance Technologies LLC recently waived the 1% management fee on its $3bn Renaissance Institutional Futures fund in what is widely recognised as a move to assuage investors' dissatisfaction with its performance.

Our survey results show that the median level of base fees for FoHFs is expected to decline 17% to 90-100bps. Meanwhile, the median level of performance fees for hedge funds is expected to decline 25% to 10-15%. Our asset manager survey covered a wide range of alternative managers, covering 10 countries and 28 fund managers. Among our respondents, the biggest managers (37%) run between €1.1-5bn in AuM.

In other key findings: the expected decline in fees for the hedge fund industry is more likely to impact base fees than performance fees. “It is difficult to generalise across the board with respect to fees, but clearly there will be selective reductions by hedge funds and FoHFs to retain investors and, in some cases, attract new ones,” says one respondent.

Fees and liquidity

Survey participants were asked which fees they are likely to see drop in the coming six months. Fifty-four percent of respondents believe base fees will drop, followed by performance fees (46%). Another 29% expect hurdle rates to increase. “We are in the process of witnessing a new regime of lower fee structure and lower leverage for the hedge fund industry going forward,” according to another respondent.

Faced with crippling performance, FoHFs are using a number of approaches to better manage liquidity. Some funds have created side pockets, legally autonomous entities, in which they ring-fence the illiquid holdings of a portfolio. A side-pocket typically has restrictive redemption rules to allow assets to sit there until the market recovers. “Fees are relative to volatility, assets under management and lock up (provisions),” notes one respondent. Our survey confirms that managers are willing to cut their performance fees in exchange for a longer lock up period. This is one area where asset managers and pension schemes are likely to go head-to-head this year.

MN and VB