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The Morning Brief: Investors Flock to Hedge Fund Fees Based on Hurdles

A new survey from Credit Suisse confirms that after years of talk, hedge fund fees are changing in a big way.

So much for the “two and 20.” Here is further evidence that hedge fund fees are dramatically changing. According to a new survey from Credit Suisse, hurdle rates are the most frequently used hedge fund fee structure, reported by 79 percent of more than 200 global institutional investors. Of this group, 85 percent of family offices and 83 percent of pension funds have invested in funds with hurdle rates. Meanwhile, 71 percent of institutions invest in the founder’s class of hedge funds, the second most popular fee structure. Under these arrangements, the investor gets into a fund early at a lower fee for a set commitment period. This arrangement is most favored by funds of funds and least favored by pension funds. Longer lockups and sliding fee scales are the third and fourth most favored fee structures, respectively.

The survey also found that 14 percent of institutions have already adopted the “one-or-30” fee structure despite being introduced in late 2016. This arrangement guarantees that an investor pays at least a 1 percent management fee but never more than 30 percent of gross alpha. “Institutional investors continue to realize real progress in the ongoing realignment of interests between hedge funds and their limited partners, with more favorable fee structures and terms being offered by managers,” says Robert Leonard, managing director and global head of capital services at Credit Suisse, about the report. “We see this initiative as being in the middle innings of a discussion that continues to evolve across the industry.”

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Viking Global Investors on Monday evening disclosed positions of at least 5 percent in three different stocks, including two energy companies. The Tiger Cub says that in each case the positions were held as of July 1, so they won’t show up in the 13F filings covering second-quarter holdings, which are due out no later than August 15. The hedge fund firm, headed by O. Andreas Halvorsen, disclosed that it owns 12 million shares, or 5.8 percent, of Rice Energy. At the end of the first quarter, Viking Global held 17.5 million shares of the company, which agreed to be acquired by EQT Corp. for $6.7 billion last month. Activist investor Jana Partners has attempted to dissuade EQT from going through with the deal. Separately, Viking said it owned nearly 73 million shares, or 7.5 percent of Encana Corp., down from 79.3 million shares it held in the natural gas, oil, and natural-gas liquids producer at the end of the first quarter. In yet another filing, Viking disclosed it owned 2.42 million shares, or 6.9 percent of Calithera Biosciences, a clinical-stage biopharma company. Viking owned 2.3 million shares of Calithera at the end of the first quarter.

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Highbridge Capital Management said it owned nearly 2.556 million shares of TPG Pace Holdings Corp., or 5.69 percent of the shares as of June 28. TPG Pace Holdings is a special purpose acquisition company formed by TPG Pace Group.

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Ricky Sandler’s Eminence Capital lifted its stake in Cornerstone OnDemand by about 30 percent to more than 3 million shares, or 5.4 percent of the provider of cloud platforms to help companies recruit and train employees. The stake, which is passive, is held as of June 29.

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Hedge funds on average gained 0.84 percent in the second quarter, boosting their gains for the first half of the year to 3.26 percent, according to a new report from eVestment. The largest gains were posted by non-U.S. hedge funds. India-focused funds were up 19.08 percent in the first half, while China funds rose 17.01 percent. Africa/Middle East- and Asia-focused funds were up 10.6 percent and 10.1 percent, respectively, through the first six months.

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