High fees undermine hedge fund performance
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Fund of hedge fund (FOHF) fees are so high that the average fund performs well below the average balanced fund, according to new research by farrelly’s.
A comparison by farrelly’s of FOHFs with multi sector funds, given both are diversified funds, found that the leading Australian FOHF returned -21.1 per cent for the year to December 2009, compared to -19.7 for the average Australian balanced fund.
In addition, the leading Australian FOHF returned 2.2 per cent per annum in the five years to December 2008, compared to 5.3 per cent per annum for the average Australian balanced fund.
These findings reveal that “the very high fees imposed on FOHFs are simply too much weight to carry, even for the most talented managers", farrelly’s director Tim Farrelly said.
“In fact, all we end up with are highly expensive, risky and illiquid capital stable funds.”
The research exposed the “myth that the talent in the FOHF sector is worth the high fees”, Farrelly said.
“The talent is there, with excellent before-fee returns from hedge funds, even including last year’s debacle, but fees are a killer at a 2 per cent flat fee plus 20 per cent of all gains for the underlying manager, and another 1 per cent flat fee and 10 per cent for the FOHF manager.
“This adds up to a managed expense ratio (MER) of approximately 8 per cent per annum in good times and 3.5 per cent in bad times."
The research went on to find that halving FOHF fees across the board managed to “transform returns”, he said, with FOHFs giving better returns than balanced funds in up markets and lower risk in down markets, making them a “credible alternative to balanced funds".
The revised research table revealed the leading Australian FOHF returned -17.1 per cent for the 12 months to December 2009, compared to -19.7 per cent for the average Australian balanced fund.
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