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The Secret of Hedge Funds

The Secret of Hedge Funds

A few days ago I recorded a short video on the future of hedge funds, it centered around how hedge funds will always be around and always do very well because of their secret weapon: innovation.  Hedge Funds now invest in real estate, oil, securities, and even other hedge funds.  The entrepreneurial nature of the industry globally has develop their core strength of diverse strategies that rewards them for high performance.  It was humorous to read headlines about "The Death of Hedge Funds" because they are so quick to adapt and fit to survive any economic recession or fraud event.

What we are seeing now is a further evolution of what some hedge fund managers are charging their clients. In the past the 2 and 20 formula was different enough from long only fund fees that investors were eager to become involved.  Now after the recent crisis hedge funds are gaining assets again but many investors are worried about liquidity and poor absolute return scenarios.

Some hedge funds are addressing this through allowing investors to clawback performance fees charged in prior years if performance is not sustained.  In some cases hedge funds, such as Hermes BPK Partners are placing percentages of performance fees that are paid out over 2-3 years if positive performance keeps up.

I see this as a long-term trend and believe that eventually managers will have a percentage of their incentive fees paid out over 5 and 7 years periods of continued positive experience because that is what investors really want and innovation is what hedge funds are all about.

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Tags: The Secret of Hedge Funds, Hedge Fund Innovation, Innovation within the hedge fund industry, hedge fund investor claw backs, claw back periods for hedge fund investors, investor claw back clauses

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