By Laurence Fletcher
LONDON, March 2 (Reuters) – Hedge fund investors could be left out of pocket as managers conjure up shortcuts to earn once again the lucrative bonuses based on performance fees that were a feature of the industry before the credit crisis.
Despite 20 percent returns last year, big losses in 2008 mean that between a half and two-thirds of hedge funds are below high-water marks — performance levels they must hit before claiming a 20-percent fee on a fund’s profits.
This could persuade more managers to move to new firms where they can start earning these bumper fees straight away, forcing clients to decide whether the quality of the managers justifies the additional cost and disruption needed to follow them.
“If certain funds don’t reach their high-water marks, not the founders but the number 2s or numbers 3s in a hedge fund firm could start looking at other roles,” said one prime broker who declined to be named.
Managers staying put might be tempted to take greater risks to hit high-water marks, or could close a fund to new investors, only to launch a new and similar fund where clients committing new money will pay fees on performance straight away.