Investment

Family offices and management fees – and why hedge funds come last

Family offices have learned to be wary of the fees their managers’ charge. As a rule of thumb, they rise in line with the complexity of the investment strategies they offer.

Pension schemes share this depressing experience. The UK’s £51 billion NatWest Group pension scheme has calculated the cost of complex strategies for its main section over the ten years to 2020 against their performance benchmarks.

The fees charged by its hedge funds, including those deducted at source and through invoice, wiped out every penny of their returns against benchmark. 

In 2015 hedge funds were removed and their function was divided between alternative equity and credit returns. Over ten years, costs from alternative equity were 70% although credit strategy costs only saw an erosion of 20%.

Returns from NatWest’s reinsurance investments were wiped out by fee costs. Private equity suffered a cost wipeout of 88%.

The best return came from quoted equity strategies which only suffered a fee erosion of 18%. 

Overall, fees incurred by the scheme eroded a total of 30% against benchmark returns.

It is worth stressing NatWest has worked hard to keep cost expenses under control. Over the ten years to 2020 it has reduced the fees it pays 0.53% to 0.16%.  

Its annualised performance over five years was 11.2% against 8.8%, implying that the diversifying of its managers paid off. Shalin Bhagwan, head of pensions advisory at DWS added its manager line up would have changed over ten years. 

But he warned: “Some asset classes stand out as appearing not to have delivered sufficient value.”

Chris Sier, chairman of cost advisory service ClearGlass said: “In bad years illiquid and hedge fund managers take large management fees and in good years they take that, plus large performance fees. They always win.”

Out of 200 hedge fund portfolios in 2019, he says managers charged fees of 3.31% against a gross return of 2.88%.  In passive equity, 1,000 portfolios charged 0.18% for 4.7%.

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