Fund fees have been falling for years, but Brevan Howard, the manager of listed hedge funds BH Macro and BH Global, has recently requested that an increase be put to shareholders, otherwise they have threatened to terminate their agreement.
The introduction of the Retail Distribution Review at the start of 2013 increased the transparency around fund charges and helped to drive down costs. Research by Morningstar suggests that the average fund charges for investing in the major global stock markets have fallen from 1.27% to one percent over the last eight years, thereby boosting investor returns.
Hardly a week goes by without a manager announcing another cut, which is why it is so unusual to hear of one demanding an increase and threatening to walk if they don’t get it, but that is what has happened with Brevan Howard Capital Management. The hedge fund manager runs a portfolio of trading strategies that have delivered strong long-term returns that are uncorrelated to the major markets.
Bucking the trend
Brevan Howard, which manages the London-listed hedge funds BH Macro (LON:BHMG) and BH Global (LON:BHGG), has written a letter to the board proposing that the management fee concessions that were agreed in 2016 and 2017 be withdrawn, with the terms reverting closer to the previous position.
For BH Macro they are demanding that the fixed management and operational fee of one percent of NAV (based on the level of net assets in 2017) be increased to two percent with the notice period upped from three months to twelve months. They also want a two percent fee on any share repurchases in excess of an annual allowance and a mandatory liquidation vote for shareholders if the net assets are less than $300m at the end of any calendar quarter.
With BH Global they want the fee to increase to two percent per annum plus a performance fee of 20% in excess of a high watermark. The manager says that the proposals would provide “the needed flexibility to manage and grow one of the world’s top performing hedge funds” and that they will terminate the existing agreement if a circular containing the proposals not be published to shareholders by 17 February.
Conundrum
The letter has put the board in a difficult position, as these funds are unique and have a good overall record. Since BH Macro was launched in 2007 it has generated an annualised return of 9.1%, which is substantially better than the 6.5% achieved by MSCI World with around half of the volatility. BH Global has also done well with both funds having a low correlation to the equity markets and operating as an effective diversifier.
Brevan Howard agreed to the reduction in fees in 2017 after a period of dull returns, but it has since done much better, especially last year when the trading strategies were able to exploit the higher market volatility. It would be a significant loss to investors if the funds were withdrawn as there are few if any alternatives that can protect your portfolio against a major sell-off in the same way.
Hopefully common sense will prevail and an agreement will be reached, such as basing the existing one percent fee on the current level of assets, which would seem fair, but not going beyond that. Otherwise it would mean a substantial increase in costs or closing the funds. Investors have reacted angrily to the demands with the shares in both selling off strongly since the news was announced last Friday.