Some hedge fund managers — including Renaissance, Citadel and Diamondback — are heeding the call from institutional investors, setting up new funds, share classes or better-priced offerings.
Quantitative hedge fund heavyweight Renaissance Technologies Corp., New York, plans to introduce an institutional-only hedge fund within the next two to three months, said Matthew Scanlan, chairman and CEO of Renaissance Institutional Management, the firm's institutional subsidiary.
Another big industry player, Citadel Investment Group LLC, Chicago, this year is introducing a family of single-strategy hedge funds with more modest management charges than those on its flagship Wellington and Kensington multistrategy funds.
The Citadel Global Macro Fund, for example, charges a 2% management fee and a 20% performance fee, while the management fee for the older funds is based on the actual cost of running the fund, which varies from year to year and has strayed well above the industry standard of 2%.
Since the first quarter, institutional investors have been seriously flexing their muscles about everything from hedge fund fees to the length of time their money is locked up. Investors' tolerance for high-priced funds that reward partners of the firm more than the end investor dried up after disappointing performance in the last four months of 2008 extended into this year.
Sources said firms such as Diamondback Capital Management LLC, Stamford, Conn., are among the most recent hedge fund managers to meet institutional investor demand for lower fees by adding a share class that offers a lower fee in exchange for a longer lockup period before investors can redeem their assets.
In March, the $3.5 billion Philadelphia Public Employees Retirement System invested $10 million in Diamondback's long/short equity strategy.
The Philadelphia plan's hedge fund consultant, Jim Vos, CEO and head of research at Aksia LLC, New York, said that he and his staff have been increasingly successful in persuading other hedge fund managers to set up a separate share class on behalf of other institutional clients. The share class is often set up for a single large investor, but then can be used by other investors, Mr. Vos said.
“These share classes are a fair way to cut fees and set up better terms for institutional investors in exchange for longer lockups and larger minimums. It's definitely easier to set up these kinds of arrangements now than in the past,” Mr. Vos said.