Barclays Prime Services’ data shows funds of fund fees have come down from their old 1/10 norm. Their survey shows average management and performance fees of 0.8% and 5%.
Preqin’s Bensted says funds of funds have also introduced new and improved fee structures. “A lot of funds of funds are now offering flat management fees without the added performance fees,” she says. “Where this is happening, fees tend to be slightly higher at between 1-1.2%. For other funds of funds, there will be a performance fee, but usually there will also be a hurdle rate and some are offering interesting structures that include clawbacks. It’s important to really look at the individual fee levels and structures for funds of funds as they do vary.”
The skill premium
Although funds of funds have changed the scale and structure of their fees, the Barclays findings still show funds of funds are charging a 60 basis point ‘skill premium’ versus traditional consultants.
Their research also showed that, while funds of funds have historically lagged hedge funds, the gap has closed considerably from around 330 basis points over five years to roughly 160 basis points over one year. Notably, however, on a risk-adjusted basis, funds of funds have outperformed, posting an average Sharpe Ratio higher than the average hedge fund.
The years following the crisis have demonstrated the importance of proactive asset allocation in a world of increasing dispersion and dynamic markets, and just how much expertise is required to select and monitor allocations.
As Morten Spenner, CEO of International Asset Management, explains: “In 2008 commodity trading advisers (CTAs) and macro did really well. In 2009 you could buy anything and it went up. Credit was strong in 2010 while structured credit and special situations outperformed in 2011. 2012 and 2013 have been good for equities. People always chase performance. Flows typically followed periods of strong performance, but CTAs, for example, have found it a lot harder to generate returns since 2008 given the risk on/risk off seesaw.
“This demonstrates how investors needed to be on their toes to continually optimise their exposures,” Spenner continues. “The notion an investor could make an allocation and come back in five years is wrong. Markets are not sleepy enough to make those easy calls. Markets are more dynamic and investors need expertise no matter how they look at it.”
Dispersion among managers has also increased since pre-crisis levels. According to IAM analysis, after spiking at nearly 40% in late 2008, dispersion of six month rolling returns declined back to around 5% in 2011 before picking up again in the last two years. By the end of 2013, dispersion was back up to nearly 20% (see chart).
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