Hedge Funds Get Earful From Clients About Fees, Withdrawals
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By Saijel Kishan and Katherine Burton

April 3 (Bloomberg) — Two years ago, German investment adviser Dieter Kaiser had to board a plane bound for New York to speak with senior U.S. hedge-fund executives.

These days, those same managers visit Kaiser, the director of investment management for Feri Institutional Advisers GmbH, at his office in Bad Homburg, about 10 miles (16 kilometers) from Frankfurt.

“We’re seeing hedge-fund managers here, and they’re wearing ties now,” said Kaiser, 31, whose firm has allocated about $1 billion to private funds for its clients.

Hedge funds are paying more attention to customers after record investment losses and withdrawals cut industry assets 37 percent to $1.2 trillion last year. Accustomed to dictating their conditions for accepting money, managers are now hearing from investors demanding lower fees, more information about holdings, access to segregated accounts and easier terms for leaving funds.

The $174 billion California Public Employees’ Retirement System last month told 26 hedge funds, including New York-based Och-Ziff Capital Management Group LLC and Atticus Capital LP, that changes are needed. Sacramento, California-based Calpers, the nation’s largest public pension fund, said it wants separate accounts and the ability to get some fees returned if a manager posts losses after a winning year.

Utah Retirement Systems, the Salt Lake City-based pension fund that covers state employees, released new guidelines for hedge-fund terms earlier this year. The $16 billion fund wants firms to cut management fees, traditionally 2 percent of client assets, as their holdings grow, and to provide data such as weekly return estimates and a scorecard of winning and losing investments.

‘Fighting Back’

“For a while there, managers forgot that it was our money,” said Brad Alford, head of Alpha Capital Management LLC in Atlanta, which selects hedge funds for clients. “Now investors are fighting back.”

Funds may have received redemption requests in the first quarter for as much as 13 percent of industry assets, according to estimates by Huw van Steenis, a financial-services analyst at Morgan Stanley in London. Withdrawals may reach 20 percent for the year.

The defections follow a year in which managers lost an average of 19 percent, according to data compiled by Hedge Fund Research Inc., the most since the Chicago-based firm started tracking the industry in 1990. Even though that was half the 38 percent decline of the Standard & Poor’s 500 Index, clients count on hedge funds to make money whether markets rise or fall.

Anger Over Redemptions

At the same time, some managers limited investors’ ability to take money out. More than 18 percent of all hedge-fund assets, managed by 5 percent of firms, were subject to some sort of withdrawal restriction last year, according to Peter Douglas, principal of Singapore-based consultant GFIA Pte.

Some managers are responding.

Paul Tudor Jones, who runs the $9 billion Tudor BVI Global Fund Ltd. in Greenwich, Connecticut, told investors last month he would repeal limits on quarterly withdrawals. Currently no more than 25 percent of assets can leave the fund in any given quarter.

Brett Barth, a partner at New York-based BBR Partners, which has more than $1 billion with hedge funds, has been able to persuade “multiple” managers to let him invest this year with 2008’s high-water mark. That means he won’t have to pay a performance fee, typically 20 percent of gains, until last year’s losses are recouped. He declined to name the funds.

Resistance on Fees

Managers are also providing more timely and detailed reports on trading.

“It’s no longer a month after quarter end with three paragraphs,” he said. “Now they tell us more about what they own and what’s been driving performance.”

Still, most managers haven’t rushed to embrace the demands of the California and Utah pension funds. No multibillion-dollar funds have permanently lowered fees, or agreed to base them on multiyear performance rather than just one year.

Citadel Investment Group LLC, run by Kenneth Griffin, is charging its clients fund expenses after giving them a fee holiday last year. The Chicago-based firm’s biggest funds, Wellington and Kensington, lost 55 percent in 2008.

“We haven’t seen wholesale changes” in the industry, said Will McLean, chief investment officer for Northwestern University in Evanston, Illinois, whose endowment was about $7.6 billion in June.

May Be Temporary

Changes investors are seeing now may disappear if managers make money and clients return to the industry.

“Only time will tell whether these measures will be permanent or just a temporary accommodation after the industry posted losses,” said John Brunjes, a partner at New York-based law firm Bracewell & Giuliani LLP, whose clients include hedge funds.

Some funds’ survival depends on attracting new clients who will pay full fees. Last year, 70 percent of the industry’s 6,800 funds lost money, according to Hedge Fund Research. Most of those funds will only be able to levy the 2 percent management fee until they make investors whole.

One tactic managers are using to raise cash or hold onto clients is to offer them separate accounts, which mirror investments of their hedge funds while allowing investors to see all the trades and get out when they want.

Man Group Plc, the largest publicly traded hedge-fund manager, said March 26 that it plans to double the managed accounts it offers to 140 from 70.

Policing Managers

“The key issue around managed accounts is that you can police the manager and manage risk more effectively,” Peter Clarke, chief executive officer of the London-based company, said on a March 26 conference call. “You’re not subject to the subscription and redemption cycle of the underlying hedge fund.”

For those investors that don’t have managed accounts, hedge funds are providing more details about their holdings on a more frequent basis.

At Feri Institutional Advisers, Kaiser said a $1 billion European hedge fund has started to send its trading positions to a third-party risk-management firm, which analyzes the data and provides reports to its clients.

“We’re getting more information and better access than ever before,” said Kaiser.

To contact the reporter on this story: Saijel Kishan in New York at skishan@bloomberg.net; Katherine Burton in New York at kburton@bloomberg.net

Last Updated: April 3, 2009 00:01 EDT

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