Fund of hedge fund fees under pressure

By Tom Burroughes

LONDON (Reuters) - Funds of hedge funds are cutting fees in the face of demands from pension scheme clients piling into the $1-trillion-plus sector, but single hedge funds are trying to hold prices up, a senior industry figure said on Tuesday.

"Of course there is pressure on (fund of hedge funds') fees, as you can expect," Nils Tuchschmid, head of multi-manager portfolios at Credit Suisse (CSGN.VX: Quote, Profile, Research, Stock Buzz), said on Tuesday at the Reuters Hedge Fund and Private Equity Summit.

Funds of hedge funds, which are popular with pension-scheme clients, enable investors to tap a suite of different strategies in a single hit to spread risk.

"We have a lot of players offering the same kind of products. The natural tendency will be for these kinds of products to go for a lower and lower margin and lower fees," he told the summit.

"The (single) hedge fund managers do try to increase their fees ... Not that they are very successful," he said.

At present, hedge funds typically charge fees of 2 percent, plus performance fees of up to 20 percent if they beat pre-set targets. Some investors say average management and performance fees could halve to 1 and 10 percent, respectively.

For funds of hedge funds, there is a further layer of annual management fees of 1 percent and incentive fees of up to 10 percent.

PENSION TREND

Institutional investors, particularly pension schemes wrestling with the rising costs of a graying population, have been urged by consultants to embrace funds of hedge funds, which now account for about half of the inflows into the hedge fund sector.

There will be downward pressure on fees if firms do not offer a product that stands out, Tuchschmid said.

Performance has hit headwinds in recent years. In 2005, fund of hedge funds returned an average around 5 percent, compared with about 7 percent in 2004 and about 11 percent a year before. There are about 800 fund-of-hedge-fund companies and 1,700 funds of hedge funds.

Tuchschmid disputed a frequently made argument that a large influx of money would cut returns by crowding the market.

"I don't buy it. If the returns have not been as good as expected, it is more to do with the global situation rather than just an influx into the industry."

"It is more to do with risk premia, which are very low, than inflows coming into this industry."

He also disagreed with the idea that wealthy individuals differed markedly in their requirements of hedge funds from institutional customers like charities or pension plans.  Continued...