Agecroft's Steinbrugge on Outlook for Hedge Fund Fees (Audio)

demand from companies that produced flat panel screens. Shares jumping as much as six point four percent. Equities hired today with the now the SMP, NZDAC all advancing stocks fluctuated from much of the session, but as of the close it was an update. SMP up four to seven, a gain of two tents of one percent, NASTACK up eleven, also a gain of two tenths of one percent down. Industrials up twenty three, a gain of one tenth of one percent, Gold up eight sixty ounce the thirteen fifty

three a gain of six tenths of one percent. Crude oil up three point two percent, advancing a dollar fifty two. Talking about West Texas intermediate Brent was up today by two percent. I'm Charlie Pellett. That's a Bloomberg Business flash. You're listening to taking stock with Box and Kathleen Hayes on Bloomberg Radio taking stock of hedge funds. Taking stock of hedge fund fees with Don Steinberger. He is managing partner for Agecroft Partners. They're based in Richmond, Virginia, and

he joins us. Now, Don, I'm sure you may read the article in Bloomberg Bloomberg Business Week Steve Eisman, who made a bundle betting on the collapse of sub prime mortgage securities, who now works at New Burger Berman. He says that in the future, in ten years, that fees for hedge funds will be one point to five percent of assets per year instead of the standard two percent annual charge plus a performance fee of twenty percent of profit.

Do you agree? You know, I think there is huge pressure on fees in the hedge fund industry, and I think that pressure is going to continue, uh in the future. What I will say is, I do think that there are some managers that are specialized focused on mitch areas UM can demonstrate that they can add value, and I think there's always going to be people that are willing to pay for people that can generate returns. But that does not apply to a vast majority of the hedge funds.

It only replies applies to those maybe ten of the industry that are truly talented. Well, Don Steinberg, I remember several years ago speaking to the former president of Dallas Federalserve Bank, UM, Richard Fisher, who started at Brown Brother's Harriman and you know, bond fixed in some currencies that worked in government. Starting a hedge fund though back in the eighties when there weren't very many of them around, and sold it then, uh and and made good money

on it. Not my he probably would have, you know, done it ten years later. But he said back then he got sad this vision of things getting the industry getting so big you just would not be able to have enough people to do that kind of high performance. That the quality of the hedge fund and returns would probably be diminished over time. And it seems like that's what we've seen. Too many people jumping into a very

tough industry. I think we are seeing too many. I mean, right now they're about fifteen thousand hedge funds and it's way too money in the industry would be much better if the number was significating less. I told you, you know, I think only are high quality. The other aren't. I think because the other aren't. You're seeing really bad numbers UM for various hedge fund industry hedge fund indusseries, and you know you're going to see a big shake up

in the hedge fund industry over time. Down over the past three quarters, investors have withdrawn about twenty five billion dollars from hedge funds globally. Not that is small compared to the roughly what three trillion dollars that they manage. But why don't they just have some kind of hurdle rate that in other words, if they can't make you money above let's say a ten year treasury, they don't make money. Doesn't that seem to make sense? Well, you know,

hedge funds are um. Each hedge fund is going to make their own decision on what is in their own best interests. And the the pressure on fees for talented managers has not been that high outside of three areas. You know, when you look at the standard hetch funds fee hedge fund charges in their operating docks. Very few were going in and changing that to make it lower for their current investors or for new investors. Where you're seeing major pressure on fees is from large institutional investors.

You know, fifteen years ago, large and ugeal investors didn't get a discount. Today, big pensions and Dowmond's foundations they can get some cases fee discounts, and that pressure is

not going away. I understand that, but I don't under But what I don't understand is that if you're managing someone's money and you don't know how it's going to turn out year from year, of course, but if you're managing someone's money and they can get a relatively risk free return of one and a half percent in a tenure treasury, if you can't do better than one and a half percent, why get paid, Well, you shouldn't get paid if you can't do better than one and a

half percent. But there are certain managers, you know, like for example, UM, there's some direct lending managers out there that are getting you know, eight nine after fee returns on their portfolio, that do very good credit research. Uh, there's reinsurance managers that are not correlated to the overall marketplace that you know, they're historically they've been able to

generate you know, high single digit returns. Uh. You know there's some market neutral managers have done well, so you know there are some strategies or managers that are able to generate good returns even though a vast majority of hedge funds have not done well at the very least. Does this make it a lot easier done for investors to negotiate with hedge funds on the fees. It's your large you know, I mentioned the operating docks of hedge

funds to talk about what fees edge funds charge. Most are still charging one and a half and twenty or two and twenty to someone who's going to allocate one million dollars. If you're going to allocate you know, fifty million and your pension endowment are very large family office, you're gonna get a big discount. Where you can get

discounts is um from smaller managers. You know, fifteen thousand hedge funds majority below hundred million, five of assets are going to managers blow a hundred million a lot are offering founders share discount. Great place to invest because you know these managers are small, nimble, some of them can generate I think much better returns and larger managers off A forty act is growing, but you've got to be very careful about forty because they tend not to be

run the same way as the hedge fund. Alright, well, Don Stromberger, thank you so very much for joining us. So you'll have to come back soon and educate us on the next chapter of the hedge fund world. In particular, you're gonna make up what does it take. I bet Pim Fox will be a really good hedge fund manager, not at all. Well, you never know. I want to thank Don Steinberger, managing partner at Agecroft Partners. I want to thank our technical director Reggie Basil and our producer

Samara Lenga. I'm Kathleen Hayes, along with Pim Fox. We want to thank you for joining us today. Keep it right here. This is Bloomberg coming up. Bloomberg Law will take a look at a lawsuit targeting sixteen banks. They're being sued for allegedly manipulating a key Australian interest rate benchmark in attempt to generate billions of dollars. That's next