Further evidence that hedge funds may have to abandon the traditional Two and Twenty pricing model as performance moderates and the industry institutionalizes was noted in a Reuters news item last week.
The news agency quoted Gustav Karner, head of asset allocation at Lansforsakringar, a Swedish pension fund holding more than Euros 10 billion (US$11.9 billion), as saying he had nearly completed the sale of his 3 per cent stake in hedge funds in favor of ordinary stocks and private equity.
Karner told Reuters the typical hedge fund fee – an annual management fee of 2 percent plus performance fees of up to 20 percent if the fund beats pre-set targets – would reduce his expected returns from hedge funds in 2006 from 9 per cent to 6 per cent.
“Maybe in future (fees will come down) as more and more managers of pension funds see they are not worth the money,” Karner told Reuters in an interview. “We are still interested in hedge funds. There are skilful managers out there, but fees are now too high. When fees are more reasonable, we will start to reinvest.”
Karner has instead increased exposure to stocks, which account for around 45 per cent of his fund. He expects returns of around 8.5 percent from global equities, with fees amounting to only “basis points,” he told Reuters. Karner also told the news agency he had raised his holding in private equity to account for around 5 per cent of his portfolio.
“It is quite expensive, but it is worth the money. We believe it will create more value than equities,” he told Reuters. “I think it will give excellent returns. The fees are justified.”