GERMANY - BCA, Germany’s largest pool of independent financial brokers, has sharply criticised hedge funds, saying the products are both too costly and have performed poorly over the past few years.
On the cost issue, BCA calculated that fund-of-hedge funds, preferred by both German institutional and private investors, demanded a fixed cost of at least 4.5% of the invested sum.
“We have been warning for some time that this fee structure does not give the investor a fair chance at a sustainable growth of his investment,” said Ferdinand Haas, chief investment officer at BCA.
“What I mean by this is that hedge funds have to achieve a performance of 450 basis points above Libor (a benchmark interest rate), in order for an investor to get that fair chance,” he told IPE.
Haas also noted hedge fund indexes, particularly the benchmark CSFB Tremont, had underperformed in the past few years because the investment strategy of the underlying products was scantly profitable.
As a result of the cost and performance issues, Haas added that, for the moment, the BCA was strongly recommending private investors to steer clear of hedge funds in Germany.
BCA’s criticism comes against the backdrop of continued weak investor demand for German-domiciled hedge funds. Since their debut one year ago, the products have taken in an estimated E1.2bn – far less than the several billion euros that Germany’s fund industry had expected.
Alternative investment association BAI has acknowledged hedge funds’ sluggish debut.
According to BAI, only 13 products emerged in 2004, with another 11 soon to be approved by the German financial services regulator BaFin. “Internationally speaking, however, this number remains far below the average,” it said.
The outlook for German-domiciled hedge funds may be brighter in 2005. Horst Nottmeier, head of hedge funds approval at BaFin, said last week that beyond the hedge funds to be approved soon, another 20-30 products would soon be in the pipeline. In addition, fund industry players expect the volume for German-domiciled hedge funds to at least double this year.