Demand for lower fees and customization is pushing the small cadre of institutional systematic trend-followers to offer more affordable versions of their flagship strategies.
Competition for institutional investor assets is fierce in the managed futures market — widely accepted as the most commoditized in the hedge fund industry — with intense price competition between old-school firms such as Man AHL, Winton Capital Ltd. and Aspect Capital Ltd. and banks, alternative risk premium managers and replicators offering lower-cost exposure to trend-following strategies.
"Institutional investors are forward-looking now in the face of predicted market declines and this is playing out in the managed futures space," said Mark S. Rzepczynski, co-managing partner and CEO of AMPHI Research & Trading LLC, Boston, a global macro/managed futures advisory and brokerage firm.
"Chief investment officers are looking for crisis alpha production from systematic trend strategies that will make money in down markets but they aren't willing to pay high fees for them. Pricing is the biggest issue with these asset owners," Mr. Rzepczynski said.
External forces are putting pressure on public plan investment fees, especially in the hedge fund arena.
"Fee sensitivity is highest for any pension fund that has to publicly disclose the fees it pays and managed futures managers are being forced to capitulate," said Robert Christian, senior managing director and head of research for hedge funds-of-funds manager K2 Advisors LLC, Stamford, Conn.
The response from institutionally oriented trend-followers has been to break apart and reassemble their traditional strategies into cheaper, stripped-down versions without the modulating factors that adjust the systematic portfolio's model response to real-world factors, sources said. Also on offer are new alternative risk premium strategies that replicate the beta of the core strategy's systematic trend-following approach.
The result is a 50- to 100-basis-point flat fee range for most risk-premium strategies, sources agreed. Fees for traditional systematic trend-following strategies range between 0.75% and 1% for management fees and 10% to 20% for performance fees.