Survey Finds Alpha (and Its Pursuit) Not Dead Yet

If a penny saved is a penny earned, then a basis point saved is also a basis point (of alpha) earned. So fees obviously matter. That’s why consultancy bfinance recently polled institutional investors on their feelings about investment management fees. To the sure disappointment of funds of hedge funds, the firm found that 60% of respondents thought the “value for money” they received from funds of hedge funds was “poor”. In fact bfinance said that “not one said they get good value from FoHFs and only 40% say they get fair value.”

After the drubbing taken by funds of funds during the recent Madoff saga, this comes as no surprise. But single manager hedge funds scored a little better with only 30% saying their value for money was poor. Active long-only equity actually scored worse, with 31% saying their value for money was “poor”. (And according to this Reuters article, funds of hedge funds aren’t the only ones facing renewed fee pressure).

Not surprisingly, passive long-only investing scored highest, with 70% saying that value for money was good and only 4% saying it was poor. Global Tactical Asset Allocation (GTAA) funds scored lowest with 86% of respondents saying value for money was poor.

In a previous survey, bfinance asked the pensions whether they would be willing to trade-off liquidity for fee breaks on their alternative investments. About a fifth said they would be willing to accept a one year lock-up for a fee cut of some undetermined size while nearly a third said they would be willing to accept a 3 year lock-up for such a fee cut. Still, nearly 50% said no way, “fees were too high and simply must go down.”

But which fee must go down - management fee or performance fee? The survey found that institutional investors are more interested in negotiating down the management fee. Perhaps that’s why hedge fund behemoth Renaissance Technologies recently cut its management to zero.

Still, investors ought to watch out what they wish for. If Renaissance’s manager Jim Simons bags another billion or two this year, they won’t have as legitimate a reason to cry foul.

As bfinance managing director of research and development Olivier Cassin told Professional Pensions magazine:

Clearly, investors are still willing to pay performance fees to reward long-term skill but are no longer willing to pay active fees for beta or for ‘luck’.

The survey was conducted last month. So it integrates the calamities of last fall and makes this one of the first surveys that integrates much of the recent hedge fund drawdown into its results.

So have recent events changed portfolio allocations of these institutional investors? No really. In fact, 90% of respondents said that their allocation to single-manager hedge funds has remained “unchanged”. By comparison, only 63% said their allocation to equities will remain unchanged. And nearly 70% of fixed income investors said their allocations will remain “unchanged.”