Watson Wyatt’s Global Alternatives Survey for the year to December 2008, which analyses the top 100 alternatives managers by assets under management, found alternative assets managed on behalf of pension funds by the world’s largest investment managers fell by around 1 per cent to US$817 billion last year. The modest decline contrasted with a 40 per cent increase in the amount of alternatives invested with top managers during 2007, compared to 2006. But it’s not just the new managers that are struggling for new capital. Baldridge says established hedge funds too are reacting to the wane in appetite for risky assets, offering to waive the performance fee temporarily on new capital.

“We have also seen more reasonable terms for experienced hedge fund managers to say ‘Please give me new capital and I’ll bring you in at where everyone else is in the fund’,” Baldridge says. “’Your assets aren’t going to come in with a new clock, where every dollar that I make will be hit with a performance fee, but you can come in and let us go back up to our high water mark and we won’t charge you a performance fee on that, and then once we get back to where we were you and everyone else will all start paying performance fees again’.

That’s a reasonable, and I think very appropriate, way to get new capital back in.” Whereas in the past the standard hedge fund fee comprised a management fee of 2 per cent of the fund’s net asset value each year and a performance fee of 20 per cent of the fund’s profit, Baldridge says fees have been trimmed to 1-1.5 and 20. “And we’re seeing some hedge fund or hybrid hedge fund strategies that are clearly long bets,” she says. “It’s a fixed income play. Those are being offered at much reduced fees, somewhere between a long fixed interest manager and a hedge fund fee, because you are expecting the capital markets to give you a lot of the increase as opposed to a truly skillful manager looking to buy really good things and short really good things. “We weren’t seeing that a year or two ago; people were trying to call beta plays a 2 and 20.”