Meet the 1-or-30 fee as asset managers change investment cost structures

Asset management done right is a licence to print money. Regardless of whether the fund manager adds value by massaging your investments to deliver an above-market return, standard practice is to claim a percentage of investors’ assets as an annual fee. A few percent here and there don’t sound like a lot – until you add them up. Over a longer period, these small-looking fees can wipe out any significant gains. Passive funds, meanwhile, can easily charge only a fraction of a percent, which helps to ensure they look more attractive as investment options. With investors wising up to the impact of fees and other costs, asset managers have been looking for new ways to charge their clients while still enjoying the fruits of their endeavours. Expect to hear a lot more about a fee structure referred to as 1-or-30, which is a choice between an annual 1 percent of funds under management or 30 percent of returns that exceed a fund’s benchmark. The latter sounds appealing, though bear in mind that benchmarks can be easily manipulated and encourage index-tracking as active managers aim to avoid missing their targets. There are complications, too, with some fund managers still wanting to levy 30% in years when they miss the benchmark, claiming this cash as a prepaid performance fee credit. That’s unlikely to be exciting to investors seeking simplicity and transparency as well as competitive fees. – Jackie Cameron

By Hema Parmar

Bloomberg – Gotham Asset Management, the $6 billion money manager run by Joel Greenblatt and Robert Goldstein, is exploring a new fee structure that ties more of the fund’s pay to performance.

The firm is in talks with some investors for its Gotham Neutral Strategies hedge fund about charging one fee: the greater of a 1 percent management fee or 30 percent of returns that exceed the fund’s benchmark, according to two people familiar with the matter. The equity fund currently charges 1.5 percent of assets in management fees and 20 percent of profits, one of the people said.

Hedge funds have been trimming and altering their fees amid a backlash over lackluster returns and criticism that the standard model of charging a 2 percent management fee and a 20 percent incentive fee is too expensive. Most hedge funds charge investors too much for the performance they deliver, Greenblatt, who is Gotham’s co-chief investment officer, told Bloomberg Television in a May 2014 interview.

The Gotham Neutral Strategies fund gained 7.5 percent last year, according to another person familiar with the matter. The HFRI Market Neutral Index was up about 2 percent in that time. Since inception in July 2009, the fund has gained an annualised 7 percent.

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If the new fee structure is adopted, Gotham would join Hong Kong-based hedge fund Myriad Asset Management and others in moving to the 1-or-30 model, which has been championed by investors including the Teacher Retirement System of Texas.

As of mid-February, at least 16 multi-billion-dollar hedge funds worldwide are either in the process of implementing or have implemented the 1-or-30 fee structure that was introduced to the industry in the fourth quarter of 2016, Jonathan Koerner of Albourne Partners said in a telephone interview on Feb. 16.

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“The objective of ‘1 or 30’ is to more consistently ensure that the investor retains 70 percent of alpha generated for its investment in a hedge fund,” Koerner wrote in a white paper published in December by Albourne, which advises clients on more than $400 billion of alternative investments globally. The management fees charged in a year when the fund underperforms the benchmarks are deducted from the following year’s performance fee payment, making it, in effect, a prepaid performance fee credit, he said last month.

The Gotham Penguin Fund, which wagers on and against U.S. stocks, gained 25 percent last year, according to one of the people familiar with the matter, compared with a 5.4 percent rise in the HFRI Equity Hedge Index. Since inception in 2013, the fund has returned an annualised 15 percent.

A representative for the firm declined to comment.