Their transaction costs will also tend to be higher than long-only, reflecting increased governance for risk, higher turnover and stock borrowing costs. Managers are defensive about charging higher fees for the shorting component, however, they rightly point out that they have to manage their capacity across their range of higher-alpha funds, of which 130:30 may be just one part.

Rogers Casey, the US-based asset consultant, which is Intech Investment Consulting’s offshore information partner, produced an interesting paper on 120:20 funds last year, in which the firm suggested a benchmark which was not the broader market index but rather the long/short manager’s own long-only portfolio.

While not all managers would be able to comply with this, it would perhaps be a fairer representation of the added value through the portfolio with shorts. However, some long/short managers suggest that the long-only component of the portfolio would necessarily be different from the long-only fund portfolio because of the additional risk being taken on in long/short.

Watson Wyatt has developed a reputation among managers, at least, for being somewhat aggressive in its approach to fees, more so than other asset consultants. At last year’s annual meeting with managers, in Sydney, there was some vigorous exchanges about fees and then the firm produced a global note for clients in February where it said: “Fee structures in the asset management industry are too high for the value they offer”.

The consulting firm said that, on a global basis, total annual investment costs for pension funds increased on average by 50 per cent in the past five years – averaging about 110bps compared with 65bps in 2002. “A key reason for this is the rise in investors’ focus on alpha, which has increased their appetite for alternatives, such as hedge funds, private equity and real estate.

“Investors naturally assume that they are paying these high fees to reward manager skill, or alpha. But in most cases they are wrong. Instead they are paying alpha fees for beta performance, because the main driver of returns in recent years has been the strength of the markets.”

Watson Wyatt provided some typical examples of manager fee structures, including this long/short fund: “Take a long/short equity fund that is 100 per cent long and 30 per cent short, charging 1.5 per cent a year base fee on net asset value, plus 20 per cent of absolute performance (a fairly typical situation). Assume the manager can add an impressive 5 per cent a year alpha on both the long side and short side for every 100 per cent gross exposure (it should be noted that over the long term this would be a remarkable result), on top of a long-term annualised market return of 10 per cent and an annualised cash return of 5 per cent. On this basis, the gross annualised return would be 15 per cent, so investors pay an annual fee of 4.2 per cent, or 65 per cent of the alpha produced by the manager (4.2 per cent/6.5 per cent). In order to pay the manager only 50 per cent of the alpha in fees (the client is taking all the risk after all) the manager must generate about 7.5 per cent a year alpha on each side, and that is Warren Buffett territory!” Emotive stuff.