New Hedge Fund Strategy - Lower Fees

In a effort to reduce the number of investors withdrawing money and going elsewhere, some hedge funds are cutting their fees in an attempt to retain investors (see WSJ article). Camulos Capital for one is reducing its management fees from 2 to 1.25 percent, and its fee on profits from 20 to 10 percent. Other funds are offering sliding fee scales based on time in the fund, or lower fees for agreeing to longer lock-up periods. Ironically, such a move could hurt hedge funds in more ways than just losing income. For one, it may make it more difficult to retain top talent who are often paid from fees. Second, it may make it more difficult for funds to attract new money. With higher fees often comes higher prestige, and the expectation of good talent with a track record of returns. A lower fee structure actually seems desperate to some, and may cause investors to look to other funds that appear to have a less difficult time raising capital. As fee structure are reduced, hedge funds begin to look more like mutual funds, causing fee and return expectation to change. Higher fees can actually help to differentiate the funds, delineating the expected level of risk and reward. As with human nature, we often want what we cannot have, and are even willing to pay up to get it. Of course, a few years of negative returns changes everything, even human nature.