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CRE Insights Blog

Alignment of Fees

Family Office Expert, Richard C. Wilson, speaks about alignment of fees for Hedge Fund Managers and Investment firms. Learn more at www.familyoffices.com Hello, this is Richard Wilson. I want to record a short video about a comment that a $8 billion plus family office made at our Family Office Super Summit this week. She said that there has to be more alignment of fees, specifically with hedge fund managers, but I think also with all types of fund managers and investment firms. One idea that I’ve been pushing related to that, which is not very popular yet, but I think is inevitably going to catch on, is having performance only fees and having that go into an escrow account that drips out over eight quarters, so that if you have a big draw down or a negative event that that comes out of the, some of those past performance views so you’re not spiking the performance short term to rake some fees off the table, take them out of the investment, and then maybe there’s still a lot of risk in it, and then the market goes down more than it went up before when you took those performance fees. It’s a way for an investor to get a claw back on performance fees, and it’s a way for investors to know that their fund manager or GP is in it for the long term, and they’re in it for a longterm positive return, not a short term positive return. I think that this is really important because people often argue, “Oh, well we have to have a management fee to cover their basic costs, or we need a management fee even though we have under two millions under management,” but really, no one cares about your basic costs. They care about value, and you should be only charging for the value you provide, and you shouldn’t be charging them for when you lose their money. They could get beta access very inexpensively for 15 basis points, so charging someone two and 20 or even a 1% management fee if you’re only giving them beta returns a is not really something that investors are interested in. The future I think is all about more co-investments and more performance based fees all around in the investment industry, and the ones that implement that quickly and expedite that inevitability and are on the front end of that curve are going to benefit, and they’re going to make life harder for those that are trying to charge the one in ten, the two in 20, the one in 20 type fee model. This is Richard Wilson coming to you from Las Vegas today and the Family Office Club. Hope to see you at one of our future events. Take care.

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Richard Wilson