This content is from: Portfolio

The Morning Brief: Hedge Funds Open to Cutting Fees

Three quarters of investors surveyed by Preqin said they’d be willing to cut fees to attract and keep assets.

It looks like the balance of power in the battle over the fees has tilted toward the investor. After several years of disappointing losses, the fee fight broke out into the open last year, and data tracker Preqin discloses that three quarters of hedge fund managers say they are willing to reduce their fees, according to a recent survey of 276 hedge fund managers.

Interestingly, 10 percent are prepared to reduce performance fees, 37 percent said they would reduce their management fees, and 27 percent are open to reducing both, according to the survey. In fact, when managers were asked to identify the key drivers of change facing the industry this year, 73 percent cited performance, while 64 percent cited investor demands for more favorable fees. This compares with 33 percent and 28 percent, respectively, cited by managers in 2016.

“Concerns around these areas are growing in light of an increasingly cautious investor base,” Preqin notes in its report. To further underscore the increasing difficulty experienced by hedge fund managers, 47 percent said it has become harder to raise capital, while 36 percent said it has become harder to retain assets. Not surprisingly, Preqin reports that net investor redemptions from hedge funds accelerated through last year even though hedge funds, on average, posted their best returns since 2013.

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Saba Capital Management’s Boaz Weinstein settled a lawsuit filed by Canada’s Public Sector Pension Investment Board, a former investor, according to the Wall Street Journal. The pension fund claimed the hedge fund gave it back less money than it felt it was entitled to when it submitted redemption requests in 2015, according to the report. The issue came down to how certain assets were valued.

“The parties have agreed to settle this litigation on the following basis: they have resolved this matter as a commercial dispute involving a good faith disagreement over the valuation of two highly illiquid corporate bonds,” the two parties reportedly said in separate statements. PSP manages $117 billion. Saba manages $1.7 billion. Last year its flagship hedge fund, Saba Capital Partners, surged 22.7 percent. Saba Capital CEF Opportunities 1 Onshore — a long-only fund launched in October 2015 — returned 25 percent. One quarter of the flagship fund’s assets are invested in closed-end funds.

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Ricky Sandler’s Eminence Capital reduced its stake in Autodesk to 3.6 percent of the total outstanding. In a regulatory filing, the hedge fund firm emphasizes it sold the shares “solely for portfolio management reasons,” due to the significant price appreciation of the shares since it made its initial investment in the maker of 3-D design software. Eminence stresses the stock remains its largest position. It adds it is “pleased with the progress that has been made” in the “business model transition and operating fundamentals” and remains confident in the company’s ability to continue to create shareholder value. At year-end, the stock was the largest position of Sachem Head Capital Management, accounting for more than 36 percent of its U.S. equity portfolio. Eminence was the fifth-largest shareholder. In March 2016, Autodesk named three new directors to its board under a settlement reached with Sachem Head and Eminence Capital.

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Dan Loeb’s Third Point boosted its stake in Enphase Energy, an energy technology company, to 6.67 million shares, or 8.1 percent of the total.

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