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03 October 2018       Top 1000 Funds

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Investors are improving fee alignment with their asset managers, renegotiating old fee structures and ensuring they pay only for skill, a panel of experts told the Fiduciary Investors Symposium at Stanford University.

Albourne Partners chief executive John Claisse has helped asset owners such as the $140 billion Teacher Retirement System of Texas develop a new structure for hedge fund fees with a 1-or-30 model. Under this system, investors agree to pay more for alpha than the traditional 20 per cent. And although investors prefer to only pay for excess returns, under this model they also pay a fixed management fee to enable the manager to “keep the lights on” during periods of underperformance. Crucially, the management fee is an advance on future performance fees – managers need to earn the management fee back before they receive performance fees.

“We were set a goal to put in shape a structure that was easy to explain and where Teachers retained 70 per cent of alpha,” Claisse recalled.

He also noted that investors shouldn’t pay high fees for systematic strategies.

“There are now many ways to access underlying drivers of hedge fund strategies through risk premia,” he told delegates. These strategies have created an investable alternative that is liquid and transparent and makes it easy for investors to assess whether they are genuinely getting alpha. “The pressure on hedge funds to justify returns has never been greater,” Claisse said. “Don’t pay for expensive beta, pay for skill.”