Subject: New hedge fund bucks trend with fees cut - FT.com
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Date: Wed, 23 Jan 2013 17:25:21 -0500

Eric D. Schwerin
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http://www.ft.com/intl/cms/s/0/2c8fdad0-64aa-11e2-ac53-00144feab49a.html#axzz2Iq9SlmNT

New hedge fund bucks trend with fees cut

One of the UK’s fastest-growing hedge funds is slashing its fees, in a move that it hopes will spark a rethink of the industry’s notoriously high charges.

The new Core Macro fund being set up by Cambridge-based Cantab Capital will employ similar trading strategies as funds from Man Group, Winton Capital and BlueCrest, three of the world’s biggest hedge funds that manage $100bn between them, but at half the cost to investors.

While the industry standard is an eye-watering “two and 20”, or 2 per cent of all capital invested annually and 20 per cent of all profits, Cantab’s new fund levies only 0.5 per cent and 10 per cent.

Fees are set to become one of the hedge fund industry’s biggest areas of change as large institutional investors try to use their clout to force discounts in a tough trading environment that has dented hedge funds’ once-high returns.

“We are seeing a substantial increase in institutional allocators investing directly in hedge funds and they are typically the most fee-sensitive,” said Daniel Caplan, European head of global prime finance at Deutsche Bank. “A key focus is not paying for returns that are purely correlated to market moves – investors can access that more cost-effectively elsewhere.”

Many hedge funds continue staunchly to resist lowering charges, argue that lower fees equate to lower quality. Man Group, Winton Capital and BlueCrest declined to comment.

Cantab’s new fund, and those from the other three, belong to a class of quantitative funds called trend followers, which use computer algorithms to spot and trade on trends across different markets, and collectively manage around $330bn in assets, according to BarclayHedge.

Ewan Kirk, Cantab’s founder, believes investors are being overcharged by many big quant funds. The trading strategies they provide can be delivered for lower costs, he said: “This is potentially a game changer,” the ex-astrophysicist told the Financial Times. “It’s like when Vanguard came out with the first index trackers.”

Established large trend following funds point out that they invest considerably in constantly refining and tweaking their models to stay ahead of new competitors and ensure investors get what they pay for.

Cantab’s new fund has capacity to manage up to $25bn based on its current trading models, Mr Kirk said. Cantab manages an existing $4.5bn quant fund, which it will continue to charge standard fees for. It capped its size last year because it believes increasing its assets will stymie performance.

Mr Kirk believes investors are being overcharged by many big quant funds. The trading strategies they provide can be delivered for far lower costs, he says.

The biggest quant funds have reduced their ability to deliver big returns as they have swelled dramatically in size in recent years, he adds, but they have not reduced their fees.

Cantab’s new fund’s easy scalability makes it a significant threat to rivals and although Cantab has yet to begin marketing the fund, details of its low charges have already led to disquiet.

The fund made 15.3 per cent last year compared with an average loss of 2.6 per cent for other trend followers, according to Hedge Fund Research. The average hedge fund made 6.2 per cent.