LONDON, April 23 (Reuters) - A fund that invests in an index of EU-regulated hedge funds is waiving its annual charge to clients, a rare move in an industry known for high fees, in a bid to win back hedge fund investors driven away by the financial crisis.
The Axiom UCITS Alternative Investable Index Fund, launched in December 2010, has dropped its 1 percent management fee and replaced it with a 10 percent performance fee, it said on Monday.
The fund tracks an index of 50 onshore ‘Ucits’ funds across a range of hedge fund strategies including fixed income, long-short equity and macro - which can encompass all strategies. The index is calculated by Swiss investment firm Alix Capital and is reweighted quarterly.
The $2 trillion hedge fund industry, which regularly sees some top managers earn billions of dollars in a year, has long been criticised over its fees, typically charging an annual fee of 2 percent, and sometimes more, whether or not the fund makes money. Funds also levy a roughly 20 percent performance fee.
Funds of funds - portfolios that hold a basket of funds to try to diversify risk and avoid blow-ups - typically charge their own layer of fees on top.
Alessandro Mauceri, chairman of the board of the Axiom fund, told Reuters the funds of hedge funds industry “has to reinvent itself or to die,” after a tough credit crisis. Many had to limit clients’ access to their cash to avoid buckling under the weight of exit requests and some were found to have invested with U.S. fraudster Bernard Madoff.
“The Axiom fund addresses clients’ ongoing concerns regarding traditional funds of hedge funds, notably their opacity, lack of liquidity, the operational risk linked to such structures and the multiple layers of fees,” he said.
However, investors will still pay 0.5 percent in fees to Alix Capital to cover administration costs.
Ucits stands for Undertakings for Collective Investment in Transferable Securities, an EU directive that allows financial institutions to sell funds into any European Union country after approval from a single member state.
Ucits funds are viewed by many investors as being more regulated, transparent and liquid than hedge funds based in the Cayman Islands, the industry’s main offshore centre.
But some executives have warned that these funds are not suited to all hedge fund types and could hit problems if markets dry up and many investors want to pull out at the same time.
Louis Zanolin, Partner at Alix Capital, argued that the Ucits-compliant hedge funds sector was on the cusp of a big upswing in popularity as investors sought cost-effective ways to gain exposure to alternative strategies with proven liquidity.
“The argument of people who are not in favour of Ucits is always ‘there’s going to be a blow-up’,” he said.
“That may well happen one day but the likelihood of that happening is lower than in an offshore structure because of the regulatory environment and all of the different entities that are responsible. If something happened, they would need to pay for it,” Zanolin added.
In 2010, BlueCrest shut a EU-regulated Ucits version of its computer-driven BlueTrend fund, citing its inability to replicate sufficiently the performance of the main offshore fund.