Generally, hedge fund attorneys and accountants haven’t seen a drastic change in hedge fund fees over the past few years. “There has been a scaling back of management fees when assets get to a certain level. I hear about it in individual cases but I’m not seeing in large amounts. I’m not seeing slippage on fees unless the manager can’t raise assets. It’s all about terms. Institutional investors are pushing managers on terms,” says Michael Gray, an attorney at the Chicago law firm of Neal Gerber Eisenberg LLP.
The world has increasingly become bifurcated in the manager community between “the haves” and “the have-nots.” George Mazin, partner at Dechert observes, “The haves” – those managers that have plenty of assets – can have all they want. “The balance of power has shifted back to “the haves.” They are less conciliatory and less willing to make deals. The “have-nots” continue to struggle to raise assets and will be a lot more flexible.”
Major institutional investors continue to drive hedge fund investments. The most demanding investors are clearly the state plans. The rest of the institutional community takes their lead from the state plans.
Ricardo Davidovich from Tannenbaum Helpern Syracuse & Hirschtritt LLP
agrees. “The investor is demanding better terms in exchange for their big ticket. The investments are being negotiated more than in the past. The institutional investor is looking more like seeding deals.”
“Hedge fund documents are definitely moving toward the LPs’ favor but good managers can still command the best terms. It’s on a deal-by-deal basis,” adds Gray.
While hedge fund documents have become more balanced [between investor and manager power] than three or four years ago, they still lag behind private equity fund documents which are more balanced than hedge fund documents, observes another attorney. “Private equity documents have investor driven provisions as investors are in private equity funds for a longer time period. The more institutional investors are driving the terms,” says Irwin Latner of Herrick Feinstein.
In its current white paper, Infovest21 explores the trends in terms from different perspectives – case studies of institutions, some managers designing product to meet institutional investor demands, investor surveys and interviews with attorneys and accountants (who represent diverse manager bases by asset size, client base and geography) who prepare manager documents.
Some specific trends are evident, such as:
Gates – Most funds have gates. The trend is toward increased use of investor-level gates. Gates are strategy dependent.
Lock-ups - Some managers will give concessions on the incentive fee in exchange for longer lock-ups. With a two to three year lock-up, the investor may pay a 15-18% performance fee.
Strategy is again an important factor. Funds that are longer term focused will lock up investors longer. Funds that are trading-oriented by nature are less concerned on the lock-up side.
In Kind Distribution - The documents are being more specific on what can be done to satisfy redemptions. Documents are specifically addressing redemptions in kind, suspensions etc. These actions were taken in 2008 and 2009 on the assumption that managers had the right to do it. Now it is being written into the documents.
Side Pockets – Some funds are without side pockets if they’re invested in very liquid assets. Some funds have stricter rules on side pockets e.g. if the manager is going to side pocket something, they must do so within a specified time of buying the position. Some funds have modified side pockets - the net effect is that a fund can side pocket an investment but it will not lower the high water mark/carry loss forward. More information is disclosed in their documents.
Fees and Expenses - Most attorneys and accountants preparing hedge fund documents say fees haven’t changed significantly in the past few years i.e. they are not seeing a change in industry standards. There has been some increased flexibility, more attention to hurdle rates and high water marks, and some customization but not any wholesale change.
Some managers have attracted new assets by carrying over high water marks i.e. no incentive fees are charged on new capital until all losses on old capital have been recovered from old capital profits.
Some have also carried over high water mark to other affiliated funds including funds with different strategies.
Excerpt from:
Infovest21 White Paper: Trends in Fund Terms
*Balance of power/alignment of interest
*Case studies: select managers designing product to meet institutional investor needs
*Gates, lock-ups, in kind distribution, side pockets, most favored nation, key man provision
*Fees and expenses
*Funds of funds and seed capital
20+ pages including graphs and footnotes
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