The Morning Brief: Fees Decline, But Investors Are Still Unhappy

Fees remain the hot topic among hedge fund investors, even though they continue to decline. According to a new report from London-based data tracker Preqin, just 35 percent of the single-manager hedge funds it tracks charge what used to be the standard 2 percent management fee and 20 percent performance fee. The average management fee these days is 1.57 percent, according to Preqin, while the average performance fee is 19.29 percent. What’s more, just 37 percent of all active funds charge a 2 percent management fee these days. However, 82 percent still have a 20 percent performance fee.

The Preqin report notes that hedge funds launched in 2016 charged an average management fee of 1.53 percent, down from 1.66 percent for funds launched in 2007. Just 32 percent of this year’s new funds charged a 2 percent management fee, compared with 47 percent in 2007. The average performance fee charged by new funds is 19.13 percent, compared with 19.48 percent for funds launched in 2007.

Despite these fee declines, nearly half of investors recently surveyed by Preqin said fees are one of the key issues facing the hedge fund industry in the second half of the year, the same percentage as those who cited performance. So it is not too surprising that 58 percent of the institutional investors surveyed think that manager and investor interests are not properly aligned. This is up from 49 percent who felt this way in Preqin’s June 2015 survey.

On the other hand, Preqin did find that fund terms are showing signs of improvement. According to the survey, 58 percent of investors think fund terms and conditions had changed in favor of investors over the past 12 months, while only 8 percent said they had changed in favor of fund managers.

Fees are a big reason for this sentiment. Nearly two-thirds of investors surveyed pointed to an improvement in management fees, while 32 percent said there have been improvements in the level of performance fees and how these are charged. However, fund firms should not get too excited. Just 15 percent of investors said they had noticed improvements over the past year, and 57 percent want to see additional changes.

“As investors seek to invest in funds that have fee structures better aligned with their interests, they may also target funds that make performance fees subject to longer-term considerations,” Preqin stresses in its report. “Terms such as clawback provisions, which allow investors to recover some of previous performance fees should these funds subsequently lose money, may become more common as investors seek to encourage performance pay-outs that reward longer-term outperformance, without encouraging excessive risk-taking over the short term.”

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Dorsal Capital Management cut its stake in Infoblox to 1.28 million shares, or 2.29 percent of the total outstanding as of September 19. As we reported, the network management services provider said earlier this week it agreed to be acquired by the private equity firm Vista Equity Partners for $1.6 billion, or $26.50 per share in cash. Redwood City, California–based Dorsal was one of four hedge fund firms that ranked among the top-ten holders of Infoblox at the end of June.

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Sandell Asset Management boosted its stake in Bob Evans Farms to about 1.6 million shares, or 8.1 percent of the total outstanding. In a regulatory filing, the New York activist firm once again called on the restaurant company to separate its BEF Foods and Bob Evans Restaurants segments in order to maximize shareholder value.

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Don’t be surprised if you see hedge funds returning to Alibaba Group Holding. On Thursday Stifel Nicolaus raised its estimated for the Chinese e-commerce giant and lifted its price target from $104 to $125. In a note to clients, the investment bank cited Alibaba’s stronger mobile monetization, current investments in cloud computing infrastructure, international expansion, and digital media content and distribution, among other factors. The stock has a dearth of major hedge fund investors — a sharp reversal from when Alibaba went public in September 2014, when it was one of the must-own issues. At the end of the third quarter of 2014, at least 106 hedge funds held a position in the stock.

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