Gotham latest to look at linking more hedge fund pay to performance

Gotham Neutral Strategies hedge fund would charge the greater of a 1% management fee or 30% of returns that exceed the fund's benchmark.

Feb 22, 2017 @ 12:20 pm

By Bloomberg News

Gotham Asset Management, the $6 billion money manager run by Joel Greenblatt and Robert Goldstein, is exploring a new fee structure for its hedge funds, one of a group of firms tying more of their pay to performance.

The firm is in talks with some investors for its Gotham Neutral Strategies hedge fund about charging one fee: the greater of a 1% management fee or 30% of returns that exceed the fund's benchmark, according to two people familiar with the matter. The equity fund currently charges 1.5% of assets in management fees and 20% of profits, one of the people said.

Hedge funds have been trimming and altering their fees amid a backlash over lackluster returns and criticism that the standard model of charging a 2% management fee and a 20% incentive fee is too expensive. Most hedge funds charge investors too much for the performance they deliver, Mr. Greenblatt, who is Gotham's co-chief investment officer, told Bloomberg Television in a May 2014 interview.

If the new fee structure is adopted, Gotham would join Hong Kong-based hedge fund Myriad Asset Management and others in moving to the 1-or-30 model, which has been championed by investors including the Teacher Retirement System of Texas.

As of mid-February, at least 16 multi-billion-dollar hedge funds worldwide are either in the process of implementing or have implemented the 1-or-30 fee structure that was introduced to the industry in the fourth quarter of 2016, Jonathan Koerner of Albourne Partners said in a telephone interview on Feb. 16.

"The objective of '1 or 30' is to more consistently ensure that the investor retains 70% of alpha generated for its investment in a hedge fund," Mr. Koerner wrote in a white paper published in December by Albourne, which advises clients on more than $400 billion of alternative investments globally. The management fees charged in a year when the fund underperforms the benchmarks are deducted from the following year's performance fee payment, making it, in effect, a prepaid performance fee credit, he said last month.

The Gotham Neutral Strategies fund gained 7.5% last year, according to another person familiar with the matter. The HFRI Market Neutral Index was up about 2% in that time. Since inception in July 2009, the fund has gained an annualized 7%.

The Gotham Penguin Fund, which wagers on and against U.S. stocks, gained 25 % last year, according to one of the people familiar with the matter, compared with a 5.4% rise in the HFRI Equity Hedge Index. Since inception in 2013, the fund has returned an annualized 15%.

A representative for the firm declined to comment.

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