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09 October 2017       Top 1000 Funds

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Hedge funds need to be more flexible with fee arrangements and respond to investor demands for fee alignment, said Albourne Partners chief executive John Claisse, who pointed to the ‘1 or 30’ fee structure the consultant helped develop with Teacher Retirement System of Texas (TRS) as an example.

“When it is working, there is an elegance,” Claisse said, speaking at the 11th-annual Investment Magazine Absolute Returns Conference, which was held in Sydney on September 14, 2017. “You are tapping entirely into your share of alpha, and paying for skill.”

As Albourne partner Jonathan Koerner explained in the case study on the $140 billion Texas Teachers, the 1 or 30 structure always pays a 1 per cent management fee or a performance fee of 30 per cent of alpha, whichever is greater. However, following periods when the 1 per cent management fee exceeded 30 per cent of alpha, an investor pays less to bring its share of alpha back to 70 per cent.

Essentially, when alpha is not sufficient to cover the 1 per cent management fee, that fee is paid as an advance on future performance fees.

“What we’re hearing from asset owners is that 1 or 30 revolutionises the conversation,” Claisse said. “It simplifies the focus to [put it] on alpha, and there is an elegance to that. Credit to TRS, they are not just doing it for their own benefit. Ultimately, it stabilises the business model of the manager, which is good for every investor.”

He says some large sovereign wealth funds are asking all their managers to consider these structures.

Furthering this, Albourne has conducted a survey, which 350 funds have completed. It found that more than 40 per cent have adopted a 1 or 30-style fee structure or are considering it.

Claisse said the beta hurdle and performance fee share are negotiable.

“This is not a one-size-fits-all,” he explained. “There are a lot of different types of fee structures for different strategies, but the important thing is they are all focused on the alignment of fees. It’s not the level but the shape of fees that’s most important.”