In its research report “Hedge Fund Investing—Opportunities and Challenges,” the consultancy says a more equitable split of the skilled outperformance is a good basis for better-aligned fee structures, which for years have worked in favor of hedge fund managers, in many instances giving them the majority share.
According to Towers Watson, the events of 2008 and the subsequent pressures faced by many hedge funds led to a re-evaluation of the value they added and the way this was shared with investors. The company says investors providing sizeable allocations, with a long-term investment horizon, now find themselves in a position of considerable negotiating power, with the traditional 2+20 fee model coming under increasing pressure.
In addition to the usual annual management fee and a performance or “incentive” fee, Towers Watson says well-aligned structures will include:
• Management fees that properly reflect the position of the business;
• Appropriate hurdle rates;
• Non-resetting high watermarks (known as a “loss carry-forward provision”);
• Extension of the performance fee calculation period;
• Clawback provisions; and
• Reasonable pass through expenses.