(This post has been corrected to reflect a change in the information supplied by Cantab Capital Partners in the fourth paragraph. The Core Macro Fund management fee does not cover back office fees, while the fund does carry a high water mark)
So far the impact of the financial crisis has not hit the wealthy as hard as many protesters would like. Even French millionaires have a found an escape from the modern-day guillotine that is a 75 percent tax rate, in the shape of Russian president Vladimir Putin.
But what about the level of charges that high net worth individuals have to pay for investing in hedge funds? Even though there has been some downward pressure on the annual management fees charged, the most common model remains “2 and 20” — 2 percent of the fund’s assets and 20 percent of its performance every year.
In real terms, for a 50 million pound hedge fund that returned 8 percent this could mean an annual fee of 1.8 million pound. The equivalent mutual fund in the UK would typically charge less than half this amount. Perhaps this should be a reason to consider switching to a different fund manager. But European investors have traditionally been more persuaded by the argument that you have to “pay more to get more” than by the notion that a fund manager should minimize costs in order to maximise returns. (Having said this, institutional investors are clearly more savvy when it comes to fees; it helps that they have the clout, through the volume of investable assets, to negotiate).
Yet perhaps the winds of change are blowing. Cantab Capital Partners has launched its Core Macro Fund with a “1/2 and 10” fee structure. The management fee of 0.5 percent (which does not cover back office costs – hedge funds do not typically quote total expense ratios) applies to those investing at least $50 million. Those investing less money will pay more, but still enjoy the 10 percent performance fee. It is hard to argue with Cantab Capital Partners’s assertion that this is “exceptionally low cost” for institutional investors, not least when considering that the fund has daily liquidity and there are neither redemption penalties nor gating clauses. But for performance fee savvy investors, the fact that there is no hurdle rate cannot be ignored. And for those looking for signs of a revolution, Cantab’s other funds have not changed their fees to move in line with the new fund.