Survey: alternative asset fees to fall in 2009

Fees for alternative asset investment strategies such private equity fund of funds and infrastructure held steady in 2008, but may come under pressure in 2009, according to a global survey of asset management fees conducted by consulting firm Mercer.

The survey shows alternative investment strategies have the highest fees for each dollar of investor capital allocated. The alternative investment strategies included in Mercer’s survey were private equity fund of funds, infrastructure funds and others like global tactical asset allocation funds, currency funds, fund of hedge funds, multi-strategy hedge funds and commodity funds.

“If you work through all the fees, per unit of alpha [gross return], you are giving up more fees on the alternative asset classes. If you have more confidence in the alpha generation of private equity managers, then you may decide that that’s a worthwhile fee to pay,” said Divyesh Hindocha, a partner Mercer.

For example, an investor allocating money to a plain vanilla fixed-income product could expect to pay 20 percent to 25 percent of the expected alpha in fees.

For private equity fund of funds, an investor might end up paying 40 percent of the alpha in fees, and even more for fund of hedge funds, Hindocha said. The firm included 33 private equity fund of funds in its sample.

Hindocha said that infrastructure funds' fee payouts fall somewhere in between the plain vanilla fixed income funds and private equity fund of funds.

For infrastructure funds, an investor earning a 15 percent IRR per year on an investment could expect to receive 12.7 percent after paying manager base fees and performance fees, the survey found, using a sample of 30 infrastructure funds.

Infrastructure funds: hypothetical returns assuming a 15 percent IRR. Source: Mercer 2008 Asset Manager Fee Survey

Those fees remained stable throughout 2008, the survey found. But going forward, Hindocha expects alternative investment strategies’ fee structures will come under increasing downward pressure.

“To some extent, investors have been disappointed with alternative asset classes and given the fees charged for them, it is reasonable to assume that one of the things that will need to change will be the terms between the provider and the investors,” Hindocha said.

“One of the pushbacks will be on the fees being charged,” he added.

Mercer’s 2008 Asset Manager Fee Survey is a biennial report analysing fee data on 19,000 asset management products from 3,400 investment management firms. This is the third time that the firm has published the survey, which is meant to serve as a reference when assessing asset management fees.