Wednesday, September 22, 2010

Performance Fees Enrich Managers but Hurt Investors says Coburn Barrett

21 September 2010 ( Performance fees encourage fund managers to take maximum short-term risk rather than thinking about higher returns in the long run, according to Coburn Barrett.

"Flat fees are the best way to ensure alignment of manager and investor interests. Performance fees do not mean higher returns; instead they encourage fund managers to take maximum short-term risk. When a bet is won, they are very well paid, but when the bet is lost, it is the investor alone who carries the loss. We saw this quite clearly and painfully in 2008", said Thomas Wehlen, Founder and Senior Fund Manager at Coburn Barrett.
"Returns absolutely matter to investors; but they need to be aware, that performance is not always the primary concern of intermediaries", says Wehlen. …
Seriously large returns need two things, maintains Coburn Barrett: they need to happen over a long period of time and the volatility has to be low enough that an investor can allocate a substantial amount to it. The average life span of a hedge fund is roughly three years, and for mutual funds it is not much longer.
Coburn Barrett believes that as important as absolute returns, is the volatility, or risk, taken to get there.
Thomas Wehlen continued: "Many funds change their risk exposure significantly over time. This burdens investors with unwanted exposure, and deprives them of opportunities for return. Over the long-term, being out of the market is very often more expensive than being in, and losing".
Katherine Blackler
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