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Hedge Funds’ Capital Idea: Fee Cuts

Wall Street Journal – In another sign of the changing power dynamics between hedge funds and their investors, funds are offering to cut fees if investors agree to stay put.

Camulos Capital LP in a letter last week asked its investors to promise to keep nearly $2 billion in place with the firm for another year as part of a restructuring. Camulos, the letter said, will take a 1.25% management fee, instead of the standard 2% fee, on most assets. If the fund makes money starting Oct. 1 through 2010, the firm will keep 10% of most profits, not the 20% that is typical of hedge funds and that Camulos investors previously agreed to pay, the letter said.

Meanwhile, Ore Hill Partners LLC, a New York money manager with about $2.8 billion in hedge-fund assets, also told clients it is ready to deal. It offered a sliding scale of fees depending on how long investors would commit money to its Ore Hill International Fund Ltd.

With returns lower this year at many hedge funds, there has been much talk of investors demanding better terms. But until now, there have been few reports of hedge funds actually changing their model.

Lowering fees can make it hard for funds to keep top analysts and traders, who often are paid out of profits, and it can undercut a fund’s prestige. Just last year, investors were begging to get into hot funds. But with hedge funds having their worst year in nearly two decades, investors are getting antsy.

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