The Writing is on the Wall


Amazon upended retail and iTunes transformed the music business.  A new business model is now threatening the highly coveted super-sized bonuses earned by private equity and hedge fund managers.

The Institutional Investor’s Roundtable represents a consortium of public and sovereign wealth funds that are coordinating their investment activities, in large part, to exercise greater control of the investment of fund assets, and correspondingly reducing the fees paid to private equity and similar hedge fund managers. Public Funds Take Control of Assets, Dodging Wall Street.

Nathaniel Popper of the New York Times reports that Abu Dhabi Investment Authority,  Alberta Investment Management Corporation, Ontario Teacher’s Pension Plan,  China Investment Corporation, the Russian Direct Investment Fund, and the public pension funds for Oregon and Wisconsin have all been adopting methods which reduce the fees paid to investment managers.

Make no mistake, the names listed above are marquee names in the investment management business.   Investment managers fall over themselves to accommodate these clients.  So, it is bad news all around for investment professionals when these clients are so focused on fee reduction.

I’m not an economist.  However, I suspect that once the fee-reduction genie is out of the bottle it is very difficult to go back to the way the private equity and hedge fund game use to be played.

As a fiduciary, I applaud these efforts.  Since the advent of modern portfolio theory, back in the 1970’s, it has been axiomatic that a reduction in fees and expenses incurred by an investment portfolio increase the investment return of the portfolio.  Increased investment returns mean greater pools of assets to be distributed to plan participants and beneficiaries.

This trend is bound to continue.  Hopefully it will accelerate.  Detroit is in bankruptcy, countless municipalities and public funds are reporting significant pension shortfalls and yet the investment management masters of the universe continue to buy trophy properties in Aspen, Nantucket and Jackson Hole.

Something is terribly amiss with this scenario.  It is high time that fiduciaries begin to exert their responsibility to reduce the outsized fees paid to these managers.


One Response to “Watch Out: Disintermediation of Hedge Funds and Private Equity”

  1. Commentators have argued that a standard methodology is needed to present an accurate picture of performance, to make individual private equity funds comparable and so the asset class as a whole can be matched against public markets and other types of investment. It is also claimed that PE fund managers manipulate data to present themselves as strong performers, which makes it even more essential to standardize the industry.

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