Funds Bow to Pressure From Utah Pension

Utah Retirement, which became a vocal advocate of revamping hedge fund terms during the financial crisis, has convinced most of the 40-odd managers it works with to reduce their management fees.

The $19 billion pension system has won fee concessions both from existing fund managers and vehicles it has invested in since the market meltdown in late 2008. Almost all of those fund operators are now charging less than the industry-standard 2% of assets under management. One of the new funds agreed to drop its management fee altogether.

In some cases, the pension has convinced managers to cut its fees for all of the investors in a fund once assets under management reach certain benchmarks. "You don't need for those managers to get higher fees if they've got more assets under management," said one person familiar with the pension's thinking.

At the same time, Utah Retirement has switched some managers over to a new method for calculating incentive compensation. Instead of the typical 20% annual performance fee, the pension prefers to pay out incentive fees over 3-5 years. In a typical case, a manager might agree to receive an initial 60-70% of the performance fee, with the balance held in escrow and paid out only if the fund continues to deliver profits.

Not all managers have embraced the deferred-compensation structure. For some, such a payment schedule would lead to serious cash-flow problems, said a fund manager familiar with the pension's pitch.

In return for the fee concessions, Utah Retirement has told managers it is willing to accept longer lockups.

Several market players questioned the extent to which fund managers are willing to abide by new terms, even for big pension clients. For the most part, they said, institutional investors have the upper hand only with managers that have struggled to raise capital since the financial crisis. The attitude among blue-chip fund operators is that performance comes at a price.

"Traditionally, what you find is that people who lower fees are the people who are less talented," one market player said.

As of Dec. 31, 2009, Utah Retirement allocated $2.4 billion, or about 15% of its total assets, to its absolute-return portfolio, according to the pension's 2009 annual report. That's twice the allocation in 2006, when the pension started investing in hedge funds.

Lawrence Powell, Utah Retirement's deputy chief investment officer, has been beating the drum for improved hedge fund terms since early 2009. A regular on the financial lecture circuit, Powell believes institutional investors deserve a break on fees in exchange for a commitment to invest larger sums for longer periods.

Similar proposals have emerged from other big pension systems, including Calpers. As previously reported, the pension giant has wrung $61 million of fee concessions from its hedge fund managers since last year.

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