You have read in the past that Your Survival Guy is not keen on state pension funds that outsource their investing responsibilities to hedge funds and private equity firms. The question is, are they even making as much as cash? Many hedge fund customers are now demanding they make at least more than cash before the funds extract 20% of profits. In The Wall Street Journal, Peter Rudegeair reports on what’s known as the “cash hurdle,” writing:
Investors in hedge funds often pay high fees for mediocre returns. Now, many are demanding that fund managers not take a cut of any investment gains unless they are better than the returns available on cash.
The latest and most prominent hedge-fund manager to agree to such an arrangement, known in the industry as a “cash hurdle,” is ExodusPoint Capital Management, a firm founded by former Millennium Management executives Michael Gelband and Hyung Lee that manages about $11 billion.
After years of ho-hum performance and with antsy investors weighing an exit, the firm is introducing a new class of shares to investors that tie incentive fees to the yields of short-term government bonds, people familiar with the matter said.
Through the end of August, the firm’s flagship fund is up just 4.6%, below the 7.2% return of a broad hedge-fund index compiled by research firm PivotalPath. Three-month Treasury bills, by comparison, are currently yielding about 5%, as are many high-yield savings accounts.
Dozens of hedge-fund managers over the years have amassed billion-dollar-plus fortunes through a compensation structure that traditionally involved charging a management fee of 2% of fund assets and a performance fee of 20% of fund profits. The latter fees typically kick in whether or not a hedge fund beats a benchmark.
Action Line: With states entrusting their retiree funds to this model, is there any wonder why Your Survival Guy has concerns about state finances? Click here to subscribe to my free monthly Survive & Thrive letter.
Originally posted on Your Survival Guy.
