German institutions ‘to seek lower hedge fees’
GERMANY – German institutional investors will increasingly pressure fund of hedge fund providers to cut management and performance fees, reckons consulting firm Faros.
Since hedge funds were first legalised in January 2004, German regulator BaFin has permitted insurers and traditional German pension funds called Pensionskassen to invest 5% of their holdings in the funds, known as Dachhedgefonds, or in single hedge funds.
Dachhedgefonds have so far been the preferred vehicle for German institutions. This has been partly because these investors wish to gain familiarity with the new asset class and want to avoid the greater risk that single hedge funds carry.
Frank Umlauf, managing partner at Faros, said that another reason is that these investors “have to go the trouble and cost of performing due diligence on every single hedge they invest in.”
Faros has calculated that providers of Dachhedgefonds charge, on average, a 1.5% management fee and a performance fee of 10%.
However, Umlauf notes that as institutional investors become more experienced with hedge funds and opt more for the single variety, “they will want to negotiate lower fees for Dachhedgefonds.” Umlauf said he could not estimate how much lower the fees would go.
Jörg Sittmann, managing director of Citigroup Investment Deutschland KAG, told the Handelsblatt newspaper recently that he expected the management fee to drop to 1% soon.
So far, 20 new Dachhedgefonds and 18 single hedge funds have been approved for sale in Germany. Major providers of the former are Union Investment and DWS, Deutsche Bank’s retail fund arm.
Single hedge funds providers include Frankfurt asset management boutique Lupus alpha and, just since last week, DekaBank. Foreign hedge fund providers like Man Group have also been active in Germany.