Billionaire Steve Schwarzman has no pity for hedge funds
The hedge fund industry is grappling with issues such as volatile commodity prices and losses from big, concentrated bets, and they have had a terrible start to the year.
More than 300 hedge funds folded their tents in the last three months of 2015, the highest number of closures since the depths of the financial crisis.
Hedge funds usually charge a 2% management fee on the total amount of assets invested and keep 20% of profits made from their investments, an arrangement usually referred to as "2 and 20." In return for those high fees, they promise to deliver alpha, or outsize returns uncorrelated to the market.
But the lack of performance is prompting a lot of investors to pull out and look for cheaper alternatives instead. There's renewed pressure to cut fees among hedge funds, and Schwarzman, speaking at this week's Bernstein Thirty-Second Annual Strategic Decisions Conference, had very little sympathy for fund managers facing reductions in their generous fee structures.
Here's Schwarzman (emphasis ours):
Every time I hear this 2-20, I wish we got something like this, ever. I know someone who's doing this, but it's not us.
Investors always like to get better deals, and our objective is to make them happy and keep our positions from our pricing. Over time there's sort of relatively small changes in terms of fees going down, but what happens is there's a massive consolidation going on in the industry, so sometimes we have large accounts where you can do a tiny bit. There are people who don't do well and feel more pressured, particularly in the hedge funds, that some of those models for certain firms are under enormous pressure, and they should be because they're not delivering.
If you're not delivering, there's a fee structure that's set up to deliver superior performance, and if you don't deliver it, your life is going to change. That's not unfair in that sector. That's not every hedge fund, but there are some of them. If you're fully priced in and deliver over a bunch of years, then good luck.