News & Initiatives

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.”

Albourne commends SBAI for its guidance on Standardised Total Expense Ratio (STER). The SBAI STER calculates a single, standardised expense ratio to facilitate better understanding, comparison and monitoring of fees and expenses across alternative investment funds. A unique and important feature of the new STER methodology is that it includes the costs of research bundled with dealing commissions (often referred to as “soft dollared research costs”). Thus, the STER allows the comparison of a fund’s structural costs on an “apples to apples” basis (i.e., providing additional transparency to which operating expenses are allocated to the fund or conversely borne by the manager). The STER was developed in response to needs amongst institutional investors for a standardised tool to compare and monitor structural costs between alternative investment funds and over time. To make it useful for comparison purposes, STER excludes incentive fees which will fluctuate as a function of performance and trading related costs that will vary significantly and depend on the specific investment strategy. Given the benefits of a simple, consistent and transparent comparison of costs among funds and peer groups, the SBAI encourages the industry to start to use the STER methodology.