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January 1, 2005

Fees and Commissions Lower at Hedge Funds?

By Peter Chapman

Wall Street is bracing for lower hedge fund commissions. With last year shaping up as one of the worst on record for hedge fund returns, observers see hedge fund management fees coming under pressure. And if hedge funds are forced to cut their fees, they are likely to push for lower commissions from their brokers.

"Hedge funds' returns, and therefore fees, will likely decline," states Citigroup Smith Barney analyst Ruchi Madan. "This will result in lower revenues for the securities industry."

For the first nine months of 2003, the approximately 6,000 hedge funds tracked by Van Hedge Fund Advisors returned only 2.7 percent on a net basis. That is the third year returns have dipped below five percent since Van started counting in 1988.

Because of the low numbers, institutional money managers are said to be pressuring hedge funds for reduced fees. They typically pay one percent of assets. "Some large U.S. [money managers] have been looking for a 75 basis point management fee with little or no performance fee," report analysts at J.P. Morgan Securities.

At least one big broker is preparing for the worst. Goldman Sachs, one of the largest prime brokers, is expecting a decline in its hedge fund revenues. Goldman told Madan, however, it expects those declines to be replaced by increased activity from traditional long-only accounts. The analyst estimates Goldman derives about one-third of its commissions from hedge funds. That's up from 20 percent in 2001. The growth has offset the decline in commissions from Goldman's traditional long-only clients.