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.