New fund to launch where you’ll pay no performance fee

By Gemma Acton, CNBC


A new fund spun out from hedge fund manager Odey Asset Management will only charge investors a 1 percent management fee and zero performance fees, levels sharply lower than traditional industry standards.

The first fund from Latitude Investment Management, the Latitude Horizon fund, has been moved from Odey's hedge fund stable into a UCITS (Undertakings For The Collective Investment Of Transferable Securities) structure.

The fund's fees are being cut as part of the move and represent a steep drop from the historical hedge fund benchmark billings of 2 percent management and 20 percent performance fees. The move highlights the squeeze on revenues in an industry hit by performance woes and rapidly evaporating investor patience.

Latitude founder Freddie Lait told CNBC via email: "We believe clients are changing the way they perceive fees and value. Many absolute return strategies, in particular hedge funds charging 2 and 20, have not delivered value over the past decade. Average annual returns for equity hedge funds have been around 1.5 percent with average annual fees estimated at more than 3 percent per year.

Signs of erosion in fee levels have been mounting with reports in recent months that some multi-billion dollar hedge funds, including Brevan Howard, Caxton, Och-Ziff and Tudor Investment Corp. have implemented cuts to some of their funds and share classes.

Such is the momentum for lowering prices that hedge fund data provider Preqin last month reported the average hedge fund launching in 2016 charges just a 1.53 percent management fee and a 19.13 percent performance fee.

The result is that only 35 percent of hedge funds currently charge in line with the classic 2 and 20 percent structure, according to Preqin – a sign of the waning investor enthusiasm for aggressive costs, further reflected in its finding that 49 percent of investors claim fees are a key issue for the industry to tackle over the next year.

And it's not just hedge funds that are suffering from fee pressures.

Asset management firms Janus Capital and Henderson Group announced their tie-up this week to create a behemoth with $320 billion of assets under management. Facing a squeeze from passive investment funds which on average charge only a fraction of active management fees,observers expect the industry to continue to consolidate as active managers seek to preserve margins through exploitation of cost synergies.

Indeed, Janus and Henderson hope to generate meaningful annual cost savings of around $110 million per year within three years of closing the deal.

According to Amin Rajan, CEO of CREATE-Research: "Further trans-national mergers are inevitable as the asset industry faces two ‎existential threats: the relentless rise of the passives and in-house investing by pension plans."

"The industry has chronic excess capacity, a third of which is unproductive. Consolidation has been long overdue," he told CNBC via email.

And passive funds themselves are far from sitting comfortably, with news out of leading exchange traded fund (ETF) provide rBlackRock on Wednesday that it will slice its annual fees to between 4 basis points and 14 basis points from a previous range of 7 basis points to 16 basis points. This part of an aggressive ongoing price war between leading ETF managers in the U.S., including Vanguard,Charles Schwab and State Street, each scrabbling to win business from pension funds.

While acknowledging the threat from passive solutions, Lait believes there is still a crucial role for active management in portfolios.

"Clients are increasingly looking for passive solutions for their directional investments,and active solutions for the absolute return element of their portfolio", he said.

"We believe strong performance should always be an objective, alongside risk control and preservation of capital, which resonates well with our clients."

Clarification: This article has been updated from its first publication following clarification from the company.