Hedge fund fees have been a hot topic this year. Hedge funds have always attracted plenty of criticism for their high fee structure, but recently, as performance has deteriorated and the cost of beta has pushed to new lows, the clamour surrounding hedge fund fees has intensified.
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The biggest question hedge fund investors are asking is whether or not funds performance justifies the high fee structure. In most cases, it appears the industry is split on how to answer this question. Some funds such as Bridgwater appear to justify their high fees while others are producing a performance that is not worth paying for at all.
The question of whether or not hedge fund fees are justifiable is the topic of a critical report by the Department of Financial Services. The department has been looking into the New York state comptroller’s decision to stick with hedge funds for its pension funds despite their poor returns. The comptroller invests $181 billion for two pension systems covering local employees, police and fire personnel.
Hedge Funds Cost New York Pensioners $3.5 Billion
The report’s verdict is a damning one. The Department of Financial Services finds that the comptroller’s decision to stick with hedge funds has cost the Common Retirement Fund $3.8 billion in fees and underperformance. According to Bloomberg’s Simone Foxman and John Gittelsohn who have analysed the report from Bloomberg’s monthly hedge fund newsletter, hedge fund investments in the comptroller’s funds categorised under New York system’s “absolute return strategy,” lost 4.8% in the fiscal year to the end of March 31.
Over the same period, the average hedge fund lost 3.8% according to data compiled by Hedge Fund Research Inc. Over the long-term, the performance of hedge funds selected by the comptroller haven’t done much better. New York’s hedge fund investments have returned an average of 3.2% per annum for the past decade, compared with 5.7% for the total fund.
According to the Department of Financial Services’ report, New York’s funds have paid almost $1.1 billion in fees to absolute return managers since 2009. If the same funds were invested in global equity managers instead, their performance would have netted $2.7 billion more in gains. New York’s hedge fund investments increased by 86% between 2009 and 2015.
New York isn’t the only US region that is doubting its pension fund hedge fund investments. Last week the investment committee for the Kentucky Retirement Systems voted to exit hedge funds over a three-year period. The committee decided to withdraw about $1.5 billion from hedge funds after adding to its hedge fund allocation earlier this year. A withdrawal of $1.5 billion around 10% of the system’s $15.3 billion in assets.
Commenting on the decision, David Eager, who became the interim executive director on Sept. 1, said: “Hedge funds could be doing spectacularly but those fees just aren’t equitable.” The fund’s Absolute Return portfolio dropped 3.5% for the 12 months to the end of August.
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