“We don’t expect investors to be buying first on price,” says Marianne Feeley, head of manager research for Mercer, Asia Pacific. “The risk and return characteristics are the most important factor. [But] once a mandate is decided on, you could see investors willing to be a little bit more aggressive and fund managers willing to negotiate more.” Richard Keary, hedge fund expert and adviser to NWQ Capital Management, agrees it is the net outcome, rather than the quantum of fees, that is important.

If the fee issue drives investment selection, Keary says investors will get second class outcomes. “If someone can generate a really interesting return stream that the investor can’t get anywhere else, and they want to keep 20 per cent of that, and the investor gets the residual 80 per cent, then the investor should be indifferent, but the investor’s not,” he says. “In some cases the nominal fees are high but the outcomes are fantastic, and you should pay for them. In other cases the nominal fees are high and the outcomes are rubbish.

The fees are both the same, but one is worth it and one is not. Surely that should be the debate: is this investment worth this fee?” The debate around fees is not a new one; however in the current context, it could prompt a rethink over the nature of the relationships superannuation funds have with their hedge fund-offund providers. Super funds are beginning to question the level of service for the commensurate fee structure, and many are honing in on the fees they pay intermediaries. “It’s fairly obvious that the fund-offund model has broken down,” Hatfield says.

“A number of the fund-of-funds will survive with a standard

Cayman Island product for people who want a passive exposure to a group of hedge fund managers, with a 1 per cent management fee and a 10 per cent incentive fee…. But the larger investor, particularly Australian superannuation funds, with what’s happened over the last 12 months, that original concept of an Australian super fund putting money into a large fundof- fund group’s

Cayman Island fund at that fee structure is dead in the water.”

Going forward, Hatfield believes fund-of-fund groups are likely to form “partnership” relationships with super funds, provide greater transparency around their hedge fund exposures and allow them to participate in the due diligence process. He says: “A lot of super funds are reviewing their exposure to fund of funds and they will say to their existing provider: ‘Forget going into your standard structure, we want to go into a mandate, we want to be involved in the due diligence process for the managers you select for that mandate, we want to see a heightened level of transparency; we don’t want to see daily or monthly positions down to individual securities but we do want to see reports around your collection of that data so that you can convince us that you actually understand the underlying exposures in those hedge funds’.”