Underperforming but not underpaid – hedge funds accused of rewarding failure

Hedge Fund

When the European Central Bank announced a smaller-than-expected stimulus plan last month, Brevan Howard, one of Europe’s largest hedge funds, was one of the biggest casualties. Its master fund is said to have lost $670m after misreading the runes.

From being ahead on the year by 2.4%, the fund went 1.2% behind and finished the year down 1.99%, according to figures that came out last week. The performance, though not dismal, must have disappointed investors.

But if anybody expected such an event to have any financial impact on the firm’s partners, they have now have been disabused of that notion.

According to a filing from Companies House, the company’s UK unit paid £120.6m in compensation, up from £85.3m in the previous year, to its partners. The number of partners averaged 37 in the year, down from 45, meaning they were paid an average of £3.3m.

The hedge fund’s filing coincided with Fat Cat Tuesday, the day on which the average FTSE chief executive will have earned more than the average British worker does in a year. The average chief executive’s salary is now £4.96m a year, so Brevan Howard’s partners didn’t make as much as that – but then they don’t have to face the same level of public scrutiny as their public-company counterparts.

Brevan Howard says traders are paid on a performance basis and therefore those that did well were paid accordingly. It adds that some of those who contributed to the underperformance of its main fund might not be represented by the latest accounts, which is for the UK unit only.

Outside the industry there is widespread scepticism about the high fees charged, both in good and bad times, by hedge fund operators. “Very high rewards for good performance are only really justified if there are penalties for bad performance,” says Ruth Bender, who researches corporate governance for the Cranfield School of Management.

Partners at Brevan Howard have continued with the traditional hedge fund practice of charging 20% of any profits they make for clients alongside a fixed fee of 2%.

The twittersphere was full of incredulity over Brevan Howard’s numbers. “All that is wrong with hedge funds,” said one commenter.

Brevan Howard’s co-founder Alan Howard, whose personal fortune is estimated at £1.5bn by the Sunday Times Rich List and who is normally one of the more media-shy hedge fund managers, raised his profile when he quit the UK for Geneva in 2010. His move to low-tax Switzerland, followed by half his employees, was blamed on the threat of tighter EU regulation of hedge funds. Recently, however, some of those that departed have returned to London, unimpressed by living overseas.

Another of Brevan Howard’s co-founders was star fund manager Chris Rokos, who left in 2012 after generating a total of $4bn for the firm. Brevan Howard maintains a “financial interest” in Rokos’s new firm. The two parties earlier settled a lawsuit brought by Rokos over an employment agreement which would have prevented him from managing investors’ money until 2018.

UK-based hedge funds as a whole ended the year some 2% higher than 12 months earlier, according to Preqin, a financial data company. But during the past few months a number of hedge funds have closed to outside investors, as their investment returns have faltered.

Last week Nevsky Capital joined hedge fund firms such as billionaire Michael Platt’s BlueCrest Capital Management, Seneca Capital and SAB Capital Management in returning money to clients and adding to an accelerating trend of hedge funds shutting down globally.

Brevan Howard says it always does better when there’s some movement in interest rates, so is expecting better days ahead after the US Federal Reserve raised borrowing costs for the first time in almost a decade. The firm also expects the closure of the BlueCrest fund to be a blessing. “We’re expecting a bunch of new investors in the master fund,” an insider says.

So maybe a better year ahead for Brevan Howard’s investors? No doubt its traders will have a pretty good one too – again.

Powered by Guardian.co.ukThis article was written by David Hellier, for The Observer on Saturday 9th January 2016 16.00 Europe/London

guardian.co.uk © Guardian News and Media Limited 2010


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