Fund of hedge fund fees are so high that they are having a significant impact on investment outcomes, according to a new study conducted by specialist asset allocation house Farrelly’s.
The research, released this week, has prompted the principal of Farrelly’s, Tim Farrelly, to suggest that many of the myths surrounding hedge funds have been laid bare.
Farrelly said fund of hedge funds had once again shown that they did not ‘zig’ when other asset classes ‘zagged’, meaning they did not hedge overall portfolio outcomes.
As well, he said the crisis had also dispensed with the myth that hedge fund managers could manage the gearing in circumstances where there had been record closures of hedge funds in the third quarter of 2008.
Farrelly also questioned the fees demanded by fund of hedge fund managers and suggested that while the talent might be there, the returns resulting from that talent were significantly eroded by the size of the fees.
“The very high fees imposed on fund of hedge funds are simply too much weight to carry, even for the most talented managers,” he said. “In fact, all we end up with are highly expensive, risky and illiquid capital stable funds.”
Farrelly said his company had analysed the effect of halving fund of hedge fund fees and said in such circumstances returns would be transformed.
“However, investors should not expect to see hedge fund fees come down any time soon,” he said. “The hedge fund managers who have done well in the current environment will probably continue to demand the old 2 per cent and 20 per cent fee structures while others, having grown fat on the old fee structure, will be reluctant to halve the fees.”
