Hedge Funds Terms and Fees

Hedge Funds Resist Push to Change Terms and Fees

Hedge funds were expected to cave on demands by investors to lower fees and make it easier for investors to redeem their investment, but it seems that hedge funds have resisted the push.  As hedge funds have performed very well so far in 2009 managers feel less pressure than they once did to keep investors.

Research from Olympia Capital Management found that only a small portion of 2,659 funds reduced the time between redemption dates or reduced the lock-up period on investors' capital.  Also, hedge fund fees have not changed significantly, despite predictions of lowered fees.  Performance has been far better than last year and the hedge funds that survived 2008 are larger and were able to perform well even in the financial crisis so they have greater leverage in negotiating terms.

Funds may also be holding back on offering features that can become a double-edged sword in a crisis. Investors like buying funds that give them the option to redeem at frequent intervals. But it can also make them the first port of call for investors that can't get their money out elsewhere, even when a fund is posting strong returns.

Dozens, if not hundreds, of hedge funds slammed down "gates" last year to prevent investors from pulling money. On top of liquidity terms that can range from one month to three years, hedge funds nearly always have a right in their contracts with investors to put a gate down on part or all of their capital to avoid being forced to sell assets at inopportune times.

Long periods between redemption dealing dates can make sense for funds that invest in illiquid assets such as distressed debt, corporate loans, private equity or penny stocks. But even funds purportedly investing only in widely-traded stocks regularly lock up investors' money for a year or more and then only offer to return it on a quarterly basis.   Source

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