Hedge Funds Take 25% of Rhode Island’s Profits

Taking a quarter of the profits in fees is outlandish especially when the profits are a thin as they are for Rhode Island. The Wall Street Journal reports:

The Employees’ Retirement System of Rhode Island puts 14% of its investments in hedge funds. One firm it invests with, California-based Ascend Capital LLC, recently offered to reduce its management fee and not take a performance fee if returns didn’t hit a certain level, according to the Rhode Island state treasurer’s office. A spokesman for Ascend declined to comment.

“Hedge funds could make the case for charging a 2% management fee when they were managing much less money,” said Rhode Island Treasurer Gina Raimondo, chair of the state investment commission. “But do they still need to charge that much when they are now managing billions, not millions?”

Data from Goldman’s survey showed 26% of clients had negotiated these performance hurdles, or similar ones, while 17% had negotiated “clawbacks,” or measures that require funds to return fees if performance lags.

“In the post-2008 era, we’ve seen a lot more creativity with respect to fees,” said David Z. Solomon, co-head of Goldman Sachs’s capital introductions unit, which did the survey.

Even some of those at the vanguard of pushing for better investor terms seem willing to pay high fees for certain big-name funds, an indication of why the shift to lower fees has been gradual. Rhode Island, for example, pays management fees of 1.5% or less for most of the funds it invests in. But it continues to pay performance fees of 25% to invest with funds run by Brevan Howard Asset Management LP and the D.E. Shaw Group, two of the best-known firms in the hedge-fund world.

“The State Investment Commission always tries to negotiate better fees whenever possible, but fees are not the only consideration,” the treasurer’s spokeswoman said in a statement. It “also looks for the best expected risk and return and value for money.” Spokesmen for Brevan Howard and D.E. Shaw declined to comment.

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E.J. Smith is the Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH, where he completed course-work in Practical and Defensive Handgun, Conceal Carry Pistol, Shotguns, Precision Scope Rifle and Kidnapping Prevention. E.J. plays a Yamaha Recording Custom drum set with Zilldjian cymbals. His first drum set was a 5-piece Slingerland with Zilldjians. He grew-up worshiping Neil Peart of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West and Paris. Please get in touch with E.J. at ejsmith@youngresearch.com. Sign up here to receive all the best content from Richardcyoung.com each week.