Active managers finally took important steps to rejigger their business models last year, and now they’re closely watching whether new fee structures being introduced by firms like AllianceBernstein will appeal to investors.
AllianceBernstein and others are developing funds that directly address what investors hate about actively managed funds: high costs even when the strategies fail to beat benchmarks. AllianceBernstein’s funds, for example, will charge index-like fees if the active funds don’t live up to expectations.
Hedge funds, too, are being forced to adapt their fee models. According to a Credit Suisse survey released Tuesday, 76 percent of hedge fund investors are using at least one preferential fee arrangement. In 2009, less than 10 percent of investors negotiated preferential terms, according to the report. Preferential terms can take the form of sliding fees or hurdle rates, as well as discounts in exchange for larger tickets, longer lock-up periods, or commitments during a fund’s early stages.
Investors also signaled an unwillingness to deal with hedge funds that continue to charge exorbitant fees. Among investors polled by Credit Suisse, there was a 65 percent decrease in the use of the highest cost hedge funds, those that charged 2 and 20.
Dean Ungar, vice president and senior analyst at Moody’s Investors Service, said asset managers are closely watching how performance-fee products are doing in the market, noting that 2018 will be a critical year.
“Some managers are already trying a product like AllianceBernstein’s,” he said. “And you’ll see more products like these, if the model succeeds.”
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In its fourth quarter report on the asset management industry, Moody’s upgraded asset managers to stable for 2018, from a negative stance last year. That’s because asset managers have gotten creative, moving away from index-hugging products and introducing concentrated funds and products that are designed to generate alpha, Ungar said.
“Fund companies are giving investors a real choice now between index funds and more alpha-generating products,” he added.
Still, the industry faces an uphill battle. Flows into U.S equity funds only stabilized in the last two quarters, after nine consecutive quarters of outflows.
“None of the asset management industry’s long-term challenges have been solved,” Ungar said.
But according to the Moody’s report, asset managers will get a huge boost from tax reform. Analyzing 14 publicly traded asset managers, including BlackRock, Invesco, and T. Rowe Price, Moody’s said that the median tax rate will fall 30 percent to 24.3 percent.
The ratings firm predicted that the new tax law would increase demand for investment products, particularly from wealthy investors who will significantly benefit from the tax changes. In addition, residents in high-tax states such as New Jersey and New York are expected to invest more money into tax-advantaged strategies.
Rokhaya Cisse, an analyst at Moody’s, said there are now incentives for corporations to accelerate pension contributions.
“The new tax laws are pretty positive from an asset manager’s perspective,” she said. “They’ll change investors behavior, especially high-net-worth investors and those living in high-tax states.”