The Shape of Fees

The Head of B2Y – Fee & Liquidity, Nicolas Stylianou, alongside Fee & Liquidity Analysts Andria Mosfili and Charis Koumenidou, launched the FeeController, a new dedicated portal for clients. Albourne’s Fee Controller is a web-based tool powered by Albourne’s FeeMometerTM, a portal for users of the FeeConciliation service. It utilizes Albourne’s proprietary technology to offer real time access to analytics and tools which are subject to Albourne’s verifications and controls. The portal focuses on fee consolidation, aggregation, validation, benchmarking and reporting, both at the fund level and portfolio level. Albourne has been in the fee world from 2009 and has had a dedicated fee team since 2014. Throughout these years we have been very active in the industry introducing various concepts, tools and services. For example, during 2014 we launched the FeeMometerTM, a tool that allows clients to study the effect of different fee structures and different return environments. We have also helped introduce various concepts from the Shape of Fees in 2013 to the 1-or-30 structure in 2017. We believe that Albourne’s FeeController enables: Robust Data: There are internal controls for processing and recording the data. The team reviews and cross checks on whether the data make sense in relation to the overall fund performance. A Holistic View: The metrics and charts help simplify complex themes around fees. Resources can be utilized to present the true impact of fees against portfolio performance (e.g., in board meetings and trainings). Real Time Reporting: The fee dashboard gives relevant data points and flexibility in fee reporting. Clients have the option to create customized real time reporting across their portfolios. Fee Controller is available to clients who are signed up to Albourne’s FeeConciliation services. Albourne’s FeeConciliation service can help validate client fees and provide custom reporting at the client, sub-portfolio and individual fund level. For any questions, please email: contactus@albourne.com. Albourne offers Fee Aggregation and Fee Reconciliation services for both Hedge Funds and Private Markets.

Albourne Partners has been an advocate for fee innovation in the investment industry, focusing on the shape of fees, and fee discovery and transparency. A recent review by the firm showed that managers are being rewarded for fee innovation. John Claisse, the firm’s chief executive said there was also a relationship between manager performance and willingness to be flexible on fees. “We looked at managers that had a collective 189 different fee changes made over the last two years, and our research showed that, from the point where those changes were made, 70% had a positive trailing three-year return, so it was not necessarily managers that were already underperforming,” he said in a Fiduciary Investors Series podcast. Albourne has been looking at the shape of fees since 2012 for its clients, and implemented a 1-or-30 approach to alternative manager fees. The consultant also launched Into the Matrix initiative in 2016, gathering data from 750 funds with over $600 billion in assets, who are answering surveys about what types of fee structures they’d be willing to look at and be flexible with. Most recently, Albourne, in conjunction with AIMA, launched a due diligence questionnaire that focuses on diversity and inclusion. “We’ve had phenomenal feedback about the questionnaire and already more than 400 funds that have submitted the questionnaire. The feedback from investors is they have been struggling on how to gather the data, so having a standardised template for them is helpful. On the manager side our preliminary feedback has been positive, it is helpful in triggering their own work internally and new policies in response to thinking through the questions and enhance their own D&I.” For the full article, click here.

The Standards Board for Alternative Investments (SBAI) has published a memo on co-investments which was developed by the Standards Board’s Governance Working Group. The Standard Board’s Co-investment memo sets out the processes investment managers need to put in place to address key governance and compliance challenges that can arise when granting investors the right to co-invest. The memo also covers structuring considerations and issues in relation to fee, expense and cost allocation. Jessica Ross, Head of Customized Investments at Albourne Partners, said: “The best way for managers to address conflicts of interest and risks that can arise through co-investments is to adopt a co-investment policy which establishes procedures addressing the entire process from the allocation decision all the way through to the liquidation of the co-investment. The memo sets out these process steps, including suitability assessment of the co-investments opportunity, an investor eligibility framework, structuring considerations and the allocation/disposal approach.” Currently, the Governance Working Group is reviewing a number of other topics, including investment manager committee structures and fund Director conflicts of interest. The findings of these reviews will be published in the coming months as part of the SBAI Toolbox.

The ranks of pure-play alternative investment consulting firms are thinning as the consulting industry consolidates and firms add money management to their services, a trend that winnows investors' choices and opens up consultants to potential conflicts of interest. Faced with increasing competition from general investment consultants and pressure from asset owners to reduce fees, alternative investment consultants are adjusting by merging with other consulting firms or augmenting services with higher-profit money management and managing discretionary assets. A review of Preqin's top 20 list of nondiscretionary investment consultants and Pensions & Investments' database revealed only two pure-play alternative investment consultants that do not manage capital: Albourne Partners Ltd. and TorreyCove Capital Partners LLC. As part of the $56.5 billion Los Angeles County Employees Retirement Association’s search process earlier this year for a specialty investment consultant for hedge funds, illiquid credit and real assets, the Pasadena, Calif.-based pension fund scored bidders on potential conflicts of interest. LACERA in March hired Albourne Partners Ltd. as the best fit. Albourne had scored the highest of three finalists based on a number of factors that also included fees and services offered. Among its strengths, LACERA officials noted that Albourne was solely focused on alternative investments and that it had the least potential conflicts because it has a pure non-discretionary advisory model. The other two finalists derived a portion of their income from discretionary clients. Please refer to the full article for further details.

EuroHedge sits down with Albourne Partners co-founder Simon Ruddick to discuss fraud warnings, allocating in the aftermath of Lehman and shifting the conversation on fees. The collapse of LTCM and Bernie Madoff’s fraud: events that occurred almost a decade apart with little in common, except that they played a key role in cementing Albourne’s credibility as a leading investment consultant for hedge funds. In February 1998 the London-based firm produced a document that was hugely bearish on fixed income arbitrage. It was one of Albourne’s first strategy reports, drafted by Hitoshi Nagata, whose hedge fund, Cambridge Financial Products, had recently closed and returned investor capital because of the limited opportunity set. Unlike other pieces of research, which were only shared with clients, Albourne widely distributed its concerns on fixed income arb, which played out a few months later when hedge fund giant LTCM saw the value of its trades drop by 50% as a result of Russian currency devaluations and a flight to US treasuries. “It wasn’t luck that we wrote that, it was skill, but what was luck was that we gave it to everyone we knew,” explains co-founder Simon Ruddick. “In the summer of 1998 that was the whole story and we had this document from February pointing out all the issues, so that was a huge leap in credibility.”

Two years ago, Albourne Partners Chairman Simon Ruddick described the fees hedge funds charge as the “elephant in the room.” Disappointing returns and a lack of transparency about levies meant investors were at risk of losing interest in the market, he warned. Mark Gilbert caught up with Jonathan Koerner, the partner at Albourne who devised the arrangement, by telephone from Norwalk, Connecticut. Following is a lightly edited transcript of their conversation. MARK GILBERT: Hedge fund fees have been coming down for a while now, with Hedge Fund Research figures showing average management fees dropping to about 1.43 percent this year, while incentive fees are down to about 17 percent. Your proposal for a 1-or-30 structure has gathered pace, with more than 60 hedge funds adopting it by the end of last year. What’s the current tally? JONATHAN KOERNER: There are 77 that I know about and are confirmed. There are certainly some out there that I don’t know about. We have clients that are actively pursuing 1-or-30 or x-or-y structures across their portfolio but have decided to keep the results private. MG: In the event of a massive outperformance, it seems like the investor can lose out compared with traditional previous structures? JK: This structure won’t always benefit investors, but it will benefit them when the manager underperforms. In a way, the 1-or-30 is an insurance policy. The premium is paying extra fees when the manager truly outperforms. But that is the only condition under which the investor pays more. The protection the investor buys is avoiding the risk of overpaying for underperformance.

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.”

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.

Alternative investment consultant Albourne Partners has been named as the sector’s most influential name in HFMWeek’s annual investor Power 30 rankings, as it leads the charge on fee innovation and transparency. Albourne’s efforts in promoting a new ‘1 or 30’ fee structure, which sees managers earn either a 1% management fee or a 30% share of alpha-generated performance over a benchmark if that becomes greater, has been tipped as a hugely significant move by prime brokers and managers canvassed for HFMWeek’s research highlighting the industry’s 30 most influential investor-related firms. Well over 50 hedge fund managers are implementing the new fee structure which Albourne has been pushing alongside long-standing client, the Teacher Retirement System (TRS) of Texas. A number of other investors are also asking managers for similar deals. Albourne advises clients with over $400bn in hedge fund and other alternative assets and given its reach, alongside its work on fees, it has knocked the Abu Dhabi Investment Authority (ADIA) off the top spot. ADIA, which manages over $800bn, takes the number two spot, while the $814bn China Investment Corporation, another sovereign wealth fund with over $100bn invested in hedge funds, sits in third position. A recent HFMWeek poll of 200 managers found that half of them were “seriously considering” moving to a 1 or 30-type model. Referred to by Albourne as an ‘or’ structure, the use of a management fee recoup can also be applied to a larger or tiered management fee, while the performance hurdle calculations can also be modified, by using a longer investment horizon, for example. _ Disclosure: The 2017 HFM Investor Power 30 List is a subjective compilation based on the opinion of HFM editors and consequently, the results may no longer be current or applicable. Albourne Partners is not in position to know how many firms HFM considered for this award, but the firms that appear on this list were judged on criteria such as: pushing for more consideration of environmental, social and governance factors; demanding customised structures or co-investments; leading the charge for better alignment of interest between managers and LPs; its activities over the last 12 months; opinions of managers and prime brokers. Albourne is not affiliated with HFMWeek, and did not pay a fee to be eligible to be nominated for the Ranking. The Ranking is not representative of an Albourne client’s experience. The Ranking does not reflect the subjective views of Albourne’s own clients. The Ranking is not indicative of Albourne’s current or future performance.

One of the biggest hedge fund advisers is calling for an overhaul of the industry’s exorbitant and opaque fees. Albourne Partners, which advises investors that collectively hold more than $400 billion in alternative investments such as hedge funds, will announce a plan on Tuesday that will help investors determine appropriate fees, said Simon Ruddick, the London-based chairman of the adviser. Albourne Partners will collect fee information and set up a mechanism to help investors negotiate the best rates, he said. “At the moment, fees are the elephant in the room,” Ruddick said in an interview with Bloomberg Television’s Haslinda Amin in Singapore. “With modest returns and for the complexity of investing in hedge funds, I think the industry really needs to take not just a step forward, but a leap forward to being more transparent on the issue of price.”

As a consultant focusing on alternative assets, John Claisse wants to address the elephant in the room: hedge funds. Performance for the investment vehicle—don’t let Claisse catch you calling hedge funds an asset class—may have disappointed recently in the broadest sense of things. But Albourne's CEO believes good investment decisions require a more narrow focus. “There are parts of the hedge fund space that are performing and parts that have been underperforming,” he argues. “There’s a very broad range of managers and quality out there. A well-constructed hedge fund portfolio with skilled managers can provide a real contribution.” That’s not to say the hedge fund model is perfect—far from it. One of Claisse’s goals at Albourne is to improve that model so that investors’ interests are more aligned with those of managers. So far, he says hedge funds have already made great strides on liquidity, transparency, and governance. Up next? Fees.