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Agecroft's Steinbrugge on Outlook for Hedge Fund Fees (Audio) · Bloomberg Intelligence

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  Speaker 1: You're listening to taking stock with Box and Kathleen Hayes
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  Speaker 1: on Bloomberg Radio taking stock of hedge funds. Taking stock
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  Speaker 1: of hedge fund fees with Don Steinberger. He is managing
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  Speaker 1: partner for Agecroft Partners. They're based in Richmond, Virginia, and
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  Speaker 1: he joins us. Now, Don, I'm sure you may read
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  Speaker 1: the article in Bloomberg Bloomberg Business Week Steve Eisman, who
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  Speaker 1: made a bundle betting on the collapse of sub prime
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  Speaker 1: mortgage securities, who now works at New Burger Berman. He
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  Speaker 1: says that in the future, in ten years, that fees
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  Speaker 1: for hedge funds will be one point to five percent
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  Speaker 1: of assets per year instead of the standard two percent
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  Speaker 1: annual charge plus a performance fee of twenty percent of profit.
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  Speaker 1: Do you agree? You know, I think there is huge
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  Speaker 1: pressure on fees in the hedge fund industry, and I
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  Speaker 1: think that pressure is going to continue, uh in the future.
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  Speaker 1: What I will say is, I do think that there
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  Speaker 1: are some managers that are specialized focused on mitch areas
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  Speaker 1: UM can demonstrate that they can add value, and I
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  Speaker 1: think there's always going to be people that are willing
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  Speaker 1: to pay for people that can generate returns. But that
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  Speaker 1: does not apply to a vast majority of the hedge funds.
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  Speaker 1: It only replies applies to those maybe ten of the
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  Speaker 1: industry that are truly talented. Well, Don Steinberg, I remember
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  Speaker 1: several years ago speaking to the former president of Dallas
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  Speaker 1: Federalserve Bank, UM, Richard Fisher, who started at Brown Brother's
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  Speaker 1: Harriman and you know, bond fixed in some currencies that
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  Speaker 1: worked in government. Starting a hedge fund though back in
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  Speaker 1: the eighties when there weren't very many of them around,
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  Speaker 1: and sold it then, uh and and made good money
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  Speaker 1: on it. Not my he probably would have, you know,
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  Speaker 1: done it ten years later. But he said back then
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  Speaker 1: he got sad this vision of things getting the industry
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  Speaker 1: getting so big you just would not be able to
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  Speaker 1: have enough people to do that kind of high performance.
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  Speaker 1: That the quality of the hedge fund and returns would
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  Speaker 1: probably be diminished over time. And it seems like that's
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  Speaker 1: what we've seen. Too many people jumping into a very
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  Speaker 1: tough industry. I think we are seeing too many. I mean,
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  Speaker 1: right now they're about fifteen thousand hedge funds and it's
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  Speaker 1: way too money in the industry would be much better
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  Speaker 1: if the number was significating less. I told you, you know,
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  Speaker 1: I think only are high quality. The other aren't. I
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  Speaker 1: think because the other aren't. You're seeing really bad numbers
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  Speaker 1: UM for various hedge fund industry hedge fund indusseries, and
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  Speaker 1: you know you're going to see a big shake up
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  Speaker 1: in the hedge fund industry over time. Down over the
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  Speaker 1: past three quarters, investors have withdrawn about twenty five billion
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  Speaker 1: dollars from hedge funds globally. Not that is small compared
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  Speaker 1: to the roughly what three trillion dollars that they manage.
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  Speaker 1: But why don't they just have some kind of hurdle
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  Speaker 1: rate that in other words, if they can't make you
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  Speaker 1: money above let's say a ten year treasury, they don't
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  Speaker 1: make money. Doesn't that seem to make sense? Well, you know,
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  Speaker 1: hedge funds are um. Each hedge fund is going to
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  Speaker 1: make their own decision on what is in their own
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  Speaker 1: best interests. And the the pressure on fees for talented
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  Speaker 1: managers has not been that high outside of three areas.
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  Speaker 1: You know, when you look at the standard hetch funds
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  Speaker 1: fee hedge fund charges in their operating docks. Very few
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  Speaker 1: were going in and changing that to make it lower
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  Speaker 1: for their current investors or for new investors. Where you're
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  Speaker 1: seeing major pressure on fees is from large institutional investors.
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  Speaker 1: You know, fifteen years ago, large and ugeal investors didn't
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  Speaker 1: get a discount. Today, big pensions and Dowmond's foundations they
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  Speaker 1: can get some cases fee discounts, and that pressure is
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  Speaker 1: not going away. I understand that, but I don't under
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  Speaker 1: But what I don't understand is that if you're managing
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  Speaker 1: someone's money and you don't know how it's going to
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  Speaker 1: turn out year from year, of course, but if you're
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  Speaker 1: managing someone's money and they can get a relatively risk
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  Speaker 1: free return of one and a half percent in a
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  Speaker 1: tenure treasury, if you can't do better than one and
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  Speaker 1: a half percent, why get paid, Well, you shouldn't get
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  Speaker 1: paid if you can't do better than one and a
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  Speaker 1: half percent. But there are certain managers, you know, like
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  Speaker 1: for example, UM, there's some direct lending managers out there
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  Speaker 1: that are getting you know, eight nine after fee returns
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  Speaker 1: on their portfolio, that do very good credit research. Uh,
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  Speaker 1: there's reinsurance managers that are not correlated to the overall
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  Speaker 1: marketplace that you know, they're historically they've been able to
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  Speaker 1: generate you know, high single digit returns. Uh. You know
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  Speaker 1: there's some market neutral managers have done well, so you
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  Speaker 1: know there are some strategies or managers that are able
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  Speaker 1: to generate good returns even though a vast majority of
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  Speaker 1: hedge funds have not done well at the very least.
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  Speaker 1: Does this make it a lot easier done for investors
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  Speaker 1: to negotiate with hedge funds on the fees. It's your
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  Speaker 1: large you know, I mentioned the operating docks of hedge
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  Speaker 1: funds to talk about what fees edge funds charge. Most
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  Speaker 1: are still charging one and a half and twenty or
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  Speaker 1: two and twenty to someone who's going to allocate one
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  Speaker 1: million dollars. If you're going to allocate you know, fifty
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  Speaker 1: million and your pension endowment are very large family office,
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  Speaker 1: you're gonna get a big discount. Where you can get
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  Speaker 1: discounts is um from smaller managers. You know, fifteen thousand
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  Speaker 1: hedge funds majority below hundred million, five of assets are
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  Speaker 1: going to managers blow a hundred million a lot are
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  Speaker 1: offering founders share discount. Great place to invest because you
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  Speaker 1: know these managers are small, nimble, some of them can
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  Speaker 1: generate I think much better returns and larger managers off
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  Speaker 1: A forty act is growing, but you've got to be
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  Speaker 1: very careful about forty because they tend not to be
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  Speaker 1: run the same way as the hedge fund. Alright, well,
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  Speaker 1: Don Stromberger, thank you so very much for joining us.
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  Speaker 1: So you'll have to come back soon and educate us
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  Speaker 1: on the next chapter of the hedge fund world. In particular,
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  Speaker 1: you're gonna make up what does it take. I bet
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  Speaker 1: Pim Fox will be a really good hedge fund manager,
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  Speaker 1: not at all. Well, you never know. I want to
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  Speaker 1: thank Don Steinberger, managing partner at Agecroft Partners. I want
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  Speaker 1: to thank our technical director Reggie Basil and our producer
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  Speaker 1: Samara Lenga. I'm Kathleen Hayes, along with Pim Fox. We
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  Speaker 1: want to thank you for joining us today. Keep it
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