Facing Unhappy Investors, Managers Compromise

Tight capital conditions where even well-known names have trouble raising money are pushing fund managers to give concessions to clients. New agreements with investors have become common, but they vary, reflecting different demands from customers and varying responses from managers.

Direct reductions in fees are rare for single-strategy hedge funds, according to several investors. The changes may affect fees but often take complicated forms involving trade-offs.

Some managers have chosen to create new share classes that offer different liquidity conditions and fees, usually with a trade-off between easy redemption vs. lower fees. The reasoning is that investors are more likely to come into a fund if they have the option of a share class that more closely matches their preferences. Current clients usually get a chance to change their share class if they wish.

Another modification in fund agreements is to make the performance fee allocation to the manager less frequent, so that for instance the fee accrues annually rather than quarterly.

One change that is relatively common  is to either remove the gate that limits the amount that can be redeemed at any one time or to raise the level, so that for instance 20% can be redeemed instead of 10%. Many managers used gates to restrict redemptions in 2008-2009, with the result that investors now want to get rid of gate provisions in agreements.

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