There are a range of approaches when it comes to performance fees, with none charged at all in some cases. For a manager to keep no more than one-third of the return they deliver above the gains of the market as a whole being a good yardstick in the current climate.
As an example, this would mean few alternative beta products merit having a performance fee.
Thanks to low interest rates and high historic performance attracting investors on the hunt for return, private market managers have seen less pressure to reduce fees. This is most apparent in private equity, one of the largest alternatives markets, making value for money harder to find.
Allocating to co-investments (which requires sophisticated governance and an effort to avoid adverse selection issues), backing fledgling managers, or creating bespoke partnerships with a few favoured businesses are some of the ways investors can reduce costs. Despite some eye-wateringly expensive fees, those investment trusts that are the listed versions of private equity funds are also benefitting from this flood of capital.
There has been record issuance this year. Often management and performance fees are charged at the trust-level, with another layer of management and performance fees in most of the underlying limited partnerships and secondary deals. That is before one even attempts to calculate fund operating expenses. The associated performance drag seems to be overcome only by adding still more leverage. Caveat emptor.
Liquidity and access
Offshore hedge funds now frequently provide a range of share class liquidity options with corresponding fee breaks for accepting lock-ins. Weekly or daily liquidity is now available from funds that are very similar to hedge funds, with many such funds running identically to a hedge fund operated by the same manager, with fund fees getting more competitive.
Investors looking at unquoted equity investments on, for example, fintech platforms, will likely have seen increased liquidity in recent years, but the liquidity is still limited compared to the public markets.
Diversification
As well as trading at historically high levels, many global equity indices are weighted according to market capitalisation, meaning portfolios are skewed towards the largest public companies with little consideration to industry and geographical exposure.
This means investors who in particular are focused on passive instruments are exposed to the performance of a relatively small number of equities, even if they own a number of different passive funds.
