Many superannuation funds have been left disappointed by their hedge fund and fund of fund providers, who promised low correlation relative to the mainstream assets in their portfolio and high absolute returns, yet delivered neither. Mixed performance in 2008 is expected to put greater cost pressure on alternative product fees, and many fundof- fund providers will have their work cut out to defend the scale of fees they have been charging.
New global research from Mercer Investment Consulting suggests that while asset management fees remained stable last year, greater willingness to negotiate fees downwards, especially in alternative asset classes, will emerge in 2009 and beyond. “Historically, fees are higher in those strategies where asset managers have the most potential to outperform,” says Divyesh Hindocha, worldwide partner in Mercer’s investment consulting business. “However, anecdotal evidence suggests that increasingly asset managers will have to negotiate their fee structures with ever more cost-conscious clients. Alpha is now competing with cheap and plentiful beta and capacity is no longer an issue for most strategies.
There is the recognition that institutional investors are no longer willing to pay, upfront, such large proportions of the potential alpha, especially for the more complex strategies.” Mercer’s 2008 Asset Manager Fee Survey is a biennial report analysing fee data on 19,000 asset management products from 3400 investment management firms. The survey shows alternative investment strategies to have the highest fees for each dollar of investor capital allocated.
The most expensive mainstream category was global emerging markets equity, with median fees in the sector averaging around 0.9 per cent. Damien Hatfield, director of boutique hedge fund research and placement firm Hatfield Liptak Advisors, says he began to see evidence of super funds negotiating fees downwards as early as last year, before the year-end performance numbers were published on fund of funds. “I’m seeing transactions as low as 50 basis points, no incentive fee, for large mandates [that are] $100 million plus,” he says. “It could be as low as 50 [basis points], probably the sweet spot is between 60 and 75 basis points, no incentive fee.
The fund-of-fund groups see the writing on the wall and 50 to 90 per cent of them are willing to do those deals. The issue is: what sort of quality are you going to get in terms of relationship?” Poor quality of service is potentially the biggest risk facing super funds that are too uncompromising when it comes to bartering over fees. Mercer says that for most investors, fees are not a critical component in the evaluation of an investment manager product; however they can reduce the expected added value by anywhere from 20 to 50 per cent.