compensation scheme or asset class? | USAEMALL.com

One scoop to start: Top BlackRock executive Mark Wiedman is departing, in a move that scrambles the world’s largest money manager’s succession planning for the eventual departure of founder Larry Fink. His departure comes as BlackRock reported it had attracted record new money last year.

In today’s newsletter:

• Hedge fund managers pocket nearly half of investment gains as fees

• Natixis and Generali poised to announce asset management tie-up

• Investors in clean energy funds backtrack as rates and Trump cloud outlook

Hedge funds: compensation scheme or asset class?

A hedge fund is a “compensation scheme masquerading as an asset class” — or so the saying goes. A new analysis by LCH Investments, an investor in hedge funds, is unlikely to dispel that notion. 

Investors in hedge funds have paid out almost half of their profits in fees since the early days of the industry more than half a century ago, the data shows.

Managers generated $3.7tn of total gains before fees, but fees charged to investors were $1.8tn, or about 49 per cent of gross gains, according to LCH.

The figures, which date back to 1969, show how the scale of the fees raked in by managers has soared as the industry has matured.

“Up to the year 2000, the hedge fund fee take had been running at around a third of overall gains, but since then it has increased to a half,” said Rick Sopher, chief executive of Edmond de Rothschild Capital Holdings and chair of LCH Investments. “As returns came down, fees went up.”

The increase in the overall fee take from 30 per cent to about 50 per cent of gross gains is largely the result of higher management fees, according to LCH.

Hedge funds have historically been known for a “two and 20” fee model, where investors pay 2 per cent in management fees every year and a 20 per cent performance fee on investment gains.

Whereas management fees used to eat up less than 10 per cent of gross gains in the late 1960s and 1970s, they had taken almost 30 per cent in the past two decades, LCH said. 

The shift suggests efforts by institutional investors and investment consultants to cut fees across the board have failed, with management fees gobbling up more of the returns as gains have dwindled.

Interestingly, the three standout performers both last year and all time were multi-strategy hedge funds — DE Shaw, Izzy Englander’s Millennium Management, and Ken Griffin’s Citadel — which also have some of the highest overall charges.

DE Shaw charges way above “two and 20”, while Citadel and Millennium have a “pass-through” expenses model, where the manager passes on all costs to their end investors instead of taking an annual management fee. The pass through can amount to a de facto management fee of between 3 to 10 per cent of assets annually. A performance fee of 20-30 per cent of profits is usually charged on top. 

Click here to find out how much the fees charged by the world’s 20 most successful hedge funds compares with the rest of the industry.

Natixis and Generali close to agreeing tie-up

European banks, insurers and independent groups are evaluating their commitment to asset management, weighing up whether to double down, partner with others in pursuit of scale or withdraw from the sector. 

Those who are staying put are grappling with several dynamics. They are searching for scale in the face of declining margins, the need for investment in technology and the growing might of the largest US participants. But history shows that pulling off full-blown mergers and acquisitions in asset management is fraught with difficulties. 

Increasingly, strategic partnerships are looking like an interesting halfway house.

The latest example of this is a tie-up that would bring together two of the biggest European names in the sector. The owner of France’s Natixis Investment Managers and Italian insurer Generali are close to announcing an agreement to create an asset management joint venture. 

Under the terms of the tie-up, BPCE and Generali Investments will combine their asset management operations in a 50-50 joint venture. A non-binding preliminary agreement could be reached as early as this week.

Woody Bradford, the head of Generali’s investment division, is expected to be appointed as chief executive, while Nicolas Namias, chair of Natixis and chief executive of its owner BPCE, is set to be appointed as chair.

Natixis has €1.2tn in assets under management and Generali just over half that. Both firms operate a multi-boutique model. 

The deal would allow BPCE and Generali to retain exposure to their earnings from asset management. It is seeking to combine a capital-rich insurance company that is growing but needs more asset management products, with a business that has strong third-party distribution in retail and wholesale markets, and a number of well-respected boutiques, including Harris Associates and Loomis Sayles. 

For Generali, which receives inflows each year from its life insurance business, it makes sense to invest this money in an asset manager where it has an economic interest, rather than giving it to an external one to manage.

What do you think about the hedge fund industry charging structure, and who are the likely protagonists in asset management M&A this year? Email me: [email protected]

Chart of the week

Investors withdrew about $30bn in total from climate-focused mutual funds in 2024 after a four-year boom was undone by difficult economic conditions and the clouds cast over socially responsible investing by the election of Donald Trump.

It marked the first year since at least 2019 in which investors pulled out more than they had put in, highlighting the challenges facing the sector despite the global push to deal with climate change, write Attracta Mooney and Rachel Millard in London.

Assets under management grew more than seven-fold in the preceding four years to a record $541bn. But this dropped for the first time to $533bn last year, as positive market valuations failed to fully offset redemptions.  

Sales fell from a peak of $151bn globally in 2021 to redemptions of $29bn last year, according to data provider Morningstar.

The decline in sales came despite growing calls for the private sector to provide more capital to address climate change, as governments struggle with stretched budgets in the wake of the Covid-19 pandemic. Last year was also the hottest year on record as global warming worsened.

Hortense Bioy, head of sustainable investing research, said the election of Trump — who has called climate change a hoax and pledged to repeal President Joe Biden’s signature clean energy bill, the Inflation Reduction Act (IRA) — had created “uncertainty” around the case for green investments. Rightwing campaigns against so-called environmental, social and governance investing also hampered sales, she said.

Meanwhile we have a scoop about how European banks have threatened to pull out of the sector’s largest climate alliance unless it goes the same way as the asset management initiative and rethinks its rules, as executives on both sides of the Atlantic fret about the future of net zero collaboration ahead of Trump’s inauguration.

And don’t miss FT Money’s cover story: can sustainable investing survive Trump 2.0?

Five unmissable stories this week

Activist short seller Nathan Anderson, famous for his campaigns against Adani Group, Super Micro and Nikola, is shutting down his firm Hindenburg Research seven years after he founded it.

There are “accidents waiting to happen” in private credit because of looser lending standards and the vast amount of capital that has flooded into the sector, Nick Moakes, the chief investment officer of the £37.6bn Wellcome Trust, has warned. 

Investors have poured record amounts of money into an exchanged-traded fund run by Invesco that spreads its assets equally across the S&P 500, as concerns mount that Wall Street’s returns have become overly reliant on a handful of technology titans. 

French alternative asset manager Ardian has raised the largest fund for buying stakes in ageing private equity funds and signalled it would be open to acquisitions as it seeks to expand its business in the US. 

UK investor and philanthropist Jonathan Ruffer has admitted that his eponymous investment boutique has “failed to meet its objectives” for customers for a second year in a row by delivering less than returns on cash.

And finally

I’ll be in Davos this week for the annual jamboree that is the World Economic Forum. Hit me up if you’re there. At Lugano’s Museo d’arte, a small, riveting centennial exhibition Ernst Ludwig Kirchner and the Artists of the Rot-Blau Group explores how the German painter’s convalescence in Davos helped inspire the 1920s Rot-Blau Group of artists.

To March 23, masilugano.ch