What's evident from the full hedge fund fee information provided by a handful of U.S. public pension plans is that management fees are coming down. But it's not clear from fiscal year 2016 data whether percentages specified in contracts — 10%, 20% or 30% of profits, for example — for incentive fees are really down or not.
Still, the pension funds paid significantly less — or nothing — in incentive fees for P&I's study period because hedge fund performance was so poor, investors and hedge fund managers stressed.
Only one of the 16 hedge fund portfolios P&I reviewed for which return information was available produced a positive return during the fiscal year. Returns ranged from 0.6% to -9.1%, with an average return of -3.4% for the year.
An investment officer of a pension plan who asked not to be identified said revealing fees paid to hedge fund managers gives institutional investors overall more influence over those managers.
“If you don't calculate, report and display hedge fund fees, you're not really cognizant of the magnitude of the fees you are paying and you can't put pressure on managers for lower fees. (Pension fund investors) have got to come together and all report fees in order to bring hedge fund costs down.”
The sheer difficulty of getting hedge fund managers to provide accurate fee information in a timely, efficient manner likely is deterring many U.S. public pension plan chief investment officers from trying.
“It is an arduous task,” said Stephen L. Nesbitt, CEO of hedge fund consultant Cliffwater LLC, Marina del Rey, Calif., noting that “for an industry that insists that it's all for transparency, it's very difficult to get a hedge fund manager to give you information about what they're charging. What you do get tends to be very poor and inconsistent. It's just a mess.”
For the most part, public pension funds didn't even try to calculate their fees because “they just assumed performance was netted from the return. Historically, pension funds didn't even know what they paid,” Mr. Nesbitt said.
Even with the recent clamor for information, Mr. Nesbitt said, “whether you get fee information depends on the whim of a given manager and even then, there's usually a huge lag time. We just got fee information from a manager for a client that we requested nine months ago.”
Hedge fund managers and investors could create a standardized reporting template like the one developed for private equity reporting by the Institutional Limited Partner Association, Washington, and introduced in January 2016.
The template is getting “great traction,” said Jennifer Choi, a managing director in ILPA's industry affairs department, because having a single standardized reporting form is much easier for private equity managers to implement and provide to all of their investors.
Ms. Choi said 100 organizations, including more than 60 institutional investor limited partners and 16 private equity general partners have formally endorsed the template so far. More than 160 other private equity companies are using the template for client reporting but are waiting to make an endorsement, she said.