Executive summary - Udo Bullmann

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1.6 The costs, the management fees - the effectsIn the hedge fund industry, calculations of fees are based on two components: A 2%management fee charged on an AUM basis plus a performance fee of 20%. The performancefee is typically determined as a share of the attained absolute return in excess of a hurdle rate,often subject to so-called “high-water marks” (i.e. performance fees are only paid if the valueof AUM is above a previous high).The level of management fee on average is currently around 1.5% of AUM in the case ofsingle strategy products and reduced to 1% for FOHFs. As far as performance fees areconcerned, those paid on single strategy products are higher than for FOHFs: 25% on averagein the former and 10% in the latter.According to a UBS top-down analysis:• The global aggregated amount of fees generated by the hedge fund industry in 2004has been in the region of $ 45 Bn.• 90% ($ 41 bn) of the above amount rewarded single hedge fund managers and the last10% ($ 4 bn) those of FOHFs.As we can see, the fees are huge relative to other forms of asset management.If we assume US mutual fund industry to be around $ 7.000 bn and the averagemanagement fee to be 0.60%, the aggregate gross fee income would be (simplifying to theextreme) around $ 42 bn. In other words, it is not entirely unthinkable that the global hedgefunds industry is generating more fees than the much larger US mutual fund industry.But this is not the total picture.Some studies estimate that hedge funds pay:• 4-5 % of AUM to their managers (management fees plus performance)• Around 4 % of AuM to the investment banking industryTo maintain this pay-out and keep investors confident and satisfied, hedge funds needgrowth returns of around 20 %!This fee structure and the level is not a “law of nature”. Neither is it market based. It simplyseems to be a “characteristic” of the hedge fund industry and not questioned or challenged byanyone. We think it highly questionable because the pressure of hedge funds to create suchhuge gross returns is in itself having strong effects on the character and concrete content ofhedge fund strategies.The impact of fees and transaction costs to hedge funds, investment banks, prime brokersand trading counter parties is illustrated in a recent study (Dresdner/Kleinwort. Equityresearch. February 2007). As seen from the two charts, the “net return to investors” on theright hand side represents the HFR composite index return net of all fees. By adding the 2 %plus 20 % fee structure, the “gross performance after execution costs” is reached. If we thenadd the execution costs, we are having the “gross performance before execution costs”.18
A recent paper from Dresdner Kleinwort illustrates this point 11 :Whether or not these fees and transaction costs are sustainable in the middle or the longerrun will depend critically on at least two factors:• How can the industry sustain the necessary gross performance of around 20 %?• Are investors confident and satisfied with the net return to them from the hedge fundindustry?The size and high growth of hedge funds are in themselves creating new problems forensuring growth returns by ingenious stock picking or niche investment strategies. That iswhy we in our understanding of the hedge fund industry will make a link with the wellknown,high leverage phenomenon. For many funds employ long/short strategies - removingmarket risks which are essentially spread or arbitrage bets with a relative low return. So the11 Dresdner Kleinwort, "Credit Suisse, Deutsche Bank, UBS - How important are hedge funds for the investment banking industry?",Equity Research 6. February 2007, p.16.19
Page 1 and 2: HEDGE FUNDSAND PRIVATE EQUITY -A CR
Page 3 and 4: The need for long-term investmentTh
Page 5 and 6: On the basis of a coherent analysis
Page 7 and 8: The pension fundsWhere does all the
Page 9 and 10: 3. The target company is merged wit
Page 11 and 12: Societies’ response - current nat
Page 13 and 14: In most of the case studies, PE inv
Page 15 and 16: huge tax advantages when the rate o
Page 17 and 18: known to bank supervisors. Those da
Page 19 and 20: provide transparency with respect t
Page 21: The demand for change and better re
Page 24 and 25: industrial policy, focusing on know
Page 26 and 27: AcknowledgementsThis report has bec
Page 28 and 29: The situation we are facing now is
Page 30 and 31: market to promote the knowledge-eco
Page 32 and 33: Our desire to separate the single s
Page 34 and 35: Typically a single strategy HF oper
Page 36 and 37: In most European countries, fund ma
Page 38 and 39: It should also be signalled that:
Page 40 and 41: Institutional investorsCurrent and
Page 42 and 43: leverage in order to benefit from s
Page 46 and 47: only remaining way to boost returns
Page 48 and 49: A majority of hedge funds have limi
Page 50 and 51: Our analysis is that these concerns
Page 52 and 53: Average annual returnsTremont HF in
Page 54 and 55: 1.11. Tendency of crowdingDespite t
Page 56 and 57: • Corporate governance:“In the
Page 58 and 59: Onshore FoHFsCountryUnitedKingdomGe
Page 60 and 61: ItalyBank ofItaly•Specializedasse
Page 62 and 63: 1.14 Societies’ response - curren
Page 64 and 65: Investments are often in individual
Page 66 and 67: employed 21 . Leverage effect expla
Page 68 and 69: Investments are sold off to other c
Page 70 and 71: Private Equity: European trends in
Page 72 and 73: time because of the longer holding
Page 74 and 75: Bain CapitalPartners 74.7 9Thomas H
Page 76 and 77: Sources of new funds raised (2005)C
Page 78 and 79: The private equity manager virtuall
Page 80 and 81: The fund structuring arrangements f
Page 82 and 83: ownership transfers. But buyout cap
Page 84 and 85: equity value chain. The main areas
Page 86 and 87: of the table but that less mature c
Page 88 and 89: UCITS (Undertakings for Collective
Page 90 and 91: Article 49Within the framework of t
Page 92 and 93: open and secure retail markets and
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offeree company must give its views
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In its Communication on worker info
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est practices, promoting innovative
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- Work to ensure more consistent an
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destabilising the financial markets
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& LBOs invest. It increases financi
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In particular, incumbent managers o
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long-term competitiveness of the ac
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It also leads to further weakening
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If HFs and LBOs have brought uncert
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the social responsibilities of comp
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areas after recapitalisation 11 . I
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Furthermore, the funds in many case
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privatised with a view to stimulati
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asset stripping, and the offering o
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dividend to Valentia.The second pub
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***The three country case studies o
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eturns well below those achieved by
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investment funds - in the UK alone
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4.2 The issue of pension fundsThe p
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One year earlier the British Financ
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the fund exceeds the highest value
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5.3 Short sellingHistorically, hedg
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global financial markets. In 1998 t
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implications associated with the li
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The classic source of leverage is l
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I talk to have got a prayer in the
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The main reason for the lack of inf
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7. The need for change to ensure a
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clearly destructive must be prevent
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European Union.Part III is going to
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2. Market transparency - a common i
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International Settlements in Switze
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3.2 The main beneficiaries of regul
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within jurisdictions with enhanced
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In our view, if we want to promote
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investors.The EC should set up an i
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Alternative investment fund manager
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widely differing impacts of PE acti
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estrict investment to specific asse
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Clearly the governance authorities
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paid. There is therefore a need for
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5. Our immediate proposalsIn the pa
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isks are honestly and clearly commu
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Corporate governance provisionsLong
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ANNEX 1 - Case studiesANNEX 1 - Cas
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1. Company description ............
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AA1. Company descriptionThe Automob
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Autoteile Unger1. Company descripti
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Bulgarian Telecommunications Compan
Page 194 and 195:
Deutsche Börse1. Company descripti
Page 196 and 197:
DIS1. Company descriptionThe DIS De
Page 198 and 199:
DT-GROUP1. Company descriptionDT Gr
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(2005 €610m) resulting in an EBIT
Page 202 and 203:
FRANS BONHOMME1. Company descriptio
Page 204 and 205:
Friedrich Grohe AG1. Company descri
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3. LBO exit (secondary LBO, IPO, li
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industrial sector level. A compromi
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Linde1. Company descriptionLinde is
Page 212 and 213:
2.5 Protection of minority sharehol
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marketing outside Germany and to bo
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2.3 Effects on job creation, invest
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Peguform1. Company descriptionThe h
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PICARD1. Company descriptionPicard
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STORK1. Company descriptionThe indu
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TDC1. Company descriptionTDC is the
Page 226 and 227:
TELECOM ITALIA GROUP1. Company desc
Page 228 and 229:
2.5 Corporate governance and econom
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same way like some institutional in
Page 232 and 233:
Viterra1. Company descriptionViterr
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Glossary 1Absolute returns: The ret
Page 236 and 237:
Hurdle rate: A rate of return that
Page 238:
Stock option: An individual's right
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Executive summary - Udo Bullmann

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