AQR's Asness criticizes unwarranted hedge fund fees

BOSTON (Reuters) - Clifford Asness, co-founder of quantitative hedge fund giant AQR Capital Management, urged investors on Monday to get tough with his industry, which he said too often charged high fees for pedestrian performance.

Profits attributable to basic market performance and fairly simply strategies are not deserving of the hedge fund industry's standard fees of 2 percent of assets plus 20 percent of all gains, he said.

"Charging 20 percent for the market going up over time is really not justifiable," Asness said in a speech at the CFA Institute's annual conference in Boston.

The former head of quantitative research at Goldman Sachs, Asness founded AQR in 1998 along with Goldman colleagues David Kabiller, Robert Krail and John Liew. The firm grew to over $40 billion in under a decade, but lost almost half its assets in 2008's market turmoil and subsequent investor withdrawals.

Asness blamed losses suffered across his industry in 2008 on "a series of unfortunate events," including too many firms pursuing the same strategies and using excess leverage.

"Leverage probably got out of hand," he said.

In the future, hedge funds ought to be more transparent with investors about the risks they are taking, match limits on withdrawals to the liquidity of underlying investments and charge high fees only for performance attributable to managers' unique skills, he said.

Hedge funds are prized as so-called alternative investments that are supposed to provide returns that zig when major markets zag. But over the past decade, Asness noted, hedge fund returns have become increasingly closely correlated with the Standard & Poor's 500.

The S&P and a major hedge fund performance index displayed a correlation of 0.89 over the past five years, he said, reflecting very close performance tracking.

"I've checked this number fourteen times because it's quite an unbelievable number," he said.

Asness also criticized other hedge fund managers for continuing to charge full fees during the credit crisis even as they prevented investors from making any withdrawals.

During the speech, he recounted some of his early experiences running AQR. In its beginning stages, the quant-focused founders tried to analyze various hedge fund style indexes to understand what factors drove their results and how the styles could be copied.

But the group could never figure out what was driving the results of the "market neutral equity" style. Asness said he was particularly embarrassed since he had written his PhD dissertation about the market neutral style.

Eventually, they discovered that a major component in the index was Bernie Madoff's fund.

"Turned out what we were trying to model was a guy sitting in a room thinking: 'how do I think I did last month?'"

Asness won over the crowd of portfolio managers, analysts and financial advisors with a largely self-deprecating speech. After offering a fairly simple explanation for the profits of global macro hedge funds, Asness quipped: "If I'm doing anything today, I'm convincing everyone that I'm not a genius."

(Reporting by Aaron Pressman; editing by Andre Grenon)