Allocators Had (Limited) Power Over Fees

“It’s kind of like a broken record. Fee pressure is continuing on active managers.”


Illustration by II

Asset owners are having varying degrees of success in asking for fee discounts.

But it’s not for lack of trying. New research from institutional consulting firm Callan shows that allocators are increasingly pressuring managers to reduce fees amid a more challenging investment market.

In hedge fund-of-fund strategies, allocators negotiated average discounts of up to .14 percent (13.9 basis points) off of total fees. In active emerging and frontier market equities, discounts were a little higher at .19 percent (19.2 basis points). Active multi-asset class strategies saw average discounts of .12 percent (12.9 basis points). Callan’s fee database tracks 180 allocators, with a combined $609 billion in assets under management and $1.5 billion paid in total fees.

“The rate of decrease in active fees appears to be slowing as they perhaps approach limits for quality implementation, as negotiated discounts are already common and sizable,” said Ivan ‘Butch’ Cliff, author of the study and Callan’s director of research in a statement.

Allocators are primarily demanding discounts on actively managed funds in the public markets. Allocators paid the majority of fees — 98 percent — to active managers, up 1 percent from the previous study. Half of all active fees went to 12 percent of the investment management firms studied.

Passive investment managers have already cut fees to the bone after facing significant pressure from allocators. U.S. large-cap funds averaged 1.9 basis points in fees, while small-cap funds averaged 3 basis points.

Cliff added in an interview that although active managers faced fee pressures this past year, the pressure was less than prior studies. “The downward fee pressure on active management fees has slowed materially versus what we’ve seen in the past couple of go-arounds,” he said. “It’s still going down, but I think this race to the bottom is slowing... There’s only so low you’re going to go.”

Hedge fund-of-funds were able to rake in the highest fees — 107 basis points on average. According to Callan, these funds displayed “fee weakness,” though. That means investors negotiated discounts of 13.9 basis points off the total published fee for the largest allocations.

“I don’t think [hedge funds generally] have lived up to the promise that caused the asset owner clients to invest in them,” said Cliff. “They’re very expensive. Even though they’re public strategies, they’re not totally liquid.” Funds of funds add a layer of fees on top of those charged by underlying hedge fund managers, which amplifies this issue.

Meanwhile, private real assets brought in the second highest fees on average, at 83 basis points. Within private real assets, allocators with mandates greater than $300 million were able to shave off a fairly large portion of their fees — an 18.8 basis point discount on average.

Open-end private real asset funds were the only private asset class that Callan surveyed in this specific study. Although Callan didn’t include private equity in its analysis Cliff noted that the asset class has dominated allocations and likely pushed investors to ask for fee cuts on other investments.

“They’ve gained a lot of assets,” Cliff said of private equity firms. “It’s a bigger percentage, and they are expensive. They don’t cater to negotiation as well as public market managers.”

Institutional Investor noted in October that allocators are still waiting for fee breaks in private equity and venture capital.

“It’s kind of like a broken record,” Cliff said. “Fee pressure is continuing on active managers.”