Average Hedge Fund Only Up 2.9% For 2012 and Down 8.87% In 2011. Not Good Especially If You Are Paying 2% Of Your Invested Assets In Fees. Forget About 20% Of The Profits!
Thin hedge-fund bonuses expected in wake of weak returns.
By KAJA WHITEHOUSE NY POST
Last Updated: 9:45 AM, September 27, 2012
Many money managers are looking at lower pay â€” in the form of performance fees â€” as tepid returns for 2012 fail to make up for last yearâ€™s steep losses. As of the end of the second quarter, only 43 percent of hedge funds had cleared a performance hurdle known as high-water marks over the past 12 months, according to data from fund tracker Hedge Fund Research. For many, those that fail to hit their marks by the end of the year will forgo their usual fee of 20 percent of profits until clients have recovered from losses.
The problem dates back to the fourth quarter of 2011, when just 13 percent of funds were at levels sufficient to generate performance fees â€” the lowest level ever, including the financial crisis in 2008, according to HFRâ€™s data. Last year was a rocky one with the lingering downturn, Europeâ€™s debt woes and the historic credit downgrade of the US.
So far this year, the average hedge fund is up just 2.29 percent, compared with losses of 8.87 percent last year, according to HFRâ€™s hedge fund index, suggesting that many funds are still trying to get their heads above water.
Hedge funds usually base the high-water mark on when clients enter the fund. That means a fund that launched in 2010 â€” a good year for most hedge funds â€” and then had a bad 2011, has to make up for those losses this year before it can start collecting performance fees.
JPMorganâ€™s Highbridgeâ€™s long-short equity fund, for example, is up 6.8 percent, following losses of 12.6 percent last year, while Fortressâ€™ macro fund is up 7.4 percent following losses of 9 percent last year, according to data obtained by The Post. Europeâ€™s Landsdowne Global Financial fund is up 7.8 percent, after a whopping 20 percent drop last year.
A confidential Barclays report on the secretive world of hedge funds found that revenue from performance fees dropped by a staggering 69 percent in 2011. As a result, performance fees accounted for only 25 percent of hedge-fund revenues in 2011, vs. more than 50 percent in 2010, according to the report, which surveyed 130 managers with combined assets of $340 billion.
To pay for things like bonuses last year, many hedge funds were forced to dip into their so-called management fees, the report showed. In addition to 20 percent of the profits, most money managers collect management fees â€” often about 2 percent of assets â€” regardless of performance. Dipping into management fees to pay for bonuses tends to be easier for the big hedge funds. Smaller firms are more vulnerable when it comes to cutting bonuses, losing employees and closing up shop.
â€œIn times of stress, when youâ€™re not collecting performance fees, the ability of small hedge funds to pay employees is much more limited,â€ said Anurag Bhardwaj, head of hedge-fund consulting for Barclays. â€œThe big get bigger and survive even in adverse circumstances.â€