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Institutional investors play hard ball on fees – Cerulli

Cerulli asked managers of alternative investment strategies whether their clients negotiate the fees they are paying for their services. Slightly under half of respondents said that fees are negotiated on all potential mandates. The rest said clients only try to negotiate ‘in specific situations’.

These results contrast with a poll conducted at Expert Investor’s Alternative Ucits Congress in Paris last October, when 45% of respondents said they never negotiate fees. The bulk of those were wholesale investors, which suggests there is a significant difference in potential leverage between them and institutional investors.

Ambitious clawbacks

Institutional investors are not only negotiating management fees however. According to the asset management firms polled, the vast majority also try to bring down performance fees, and the majority occasionally want to introduce so-called clawbacks, which oblige asset managers to pay back fees if they don’t manage to achieve a certain minimal return target.

And here it gets contentious: the majority (61.5%) of institutional investors insist on an absolute return target rather than one tied to Libor, which is used as a benchmark by many alternative Ucits funds. And they tend to aim rather high: almost half insist on a return of 7-8%, and close to one in three believe managers are only are worth the money if they generate a return of more than 10% annually.

By setting the bar so high, Cerulli argues, institutional investors are playing a dangerous game, however. It could be self-defeating “if alternative managers politely ignore the institutions that want this. In only four years since 2000 did hedge funds clear that bar,” its report points out.  

A better tactic to reduce fees might be to simply agree to a longer lock-up period, as this is what many alternative investment managers, especially the smaller ones, are often desperate for. “Everyone will do that―a discount for a longer lock-up,” one UK credit hedge fund manager told Cerulli.

Part of the Bonhill Group.