One month after news that legendary investor Paul Tudor Jones’ $11.6 billion hedge fund Tudor Investment had seen some $1 billion in redemptions as a result of poor performance and the exit of several money managers, some of whom spent decades at the firm, the inevitable next step has followed: Tudor is trimming the fees it charges some clients in its biggest fund amid losses this year.
According to Bloomberg which first reported the fee cuts, an inevitable shift in a world in which most hedge funds have underperformed their benchmarks and the broader stock market for eight years in a row, Tudor will modestly reduce fees for a share class that contains most of the main fund’s money to 2.25% of assets and 25% of profits, according to a letter sent to clients on Monday and obtained by Bloomberg. The fees were 2.75% and 27% Tudor is also introducing a new pool for clients with $50 million investments or more that will charge 2 percent of assets and 25 percent of profits. The changes will take effect July 1.
The cut does not affect everyone: Tudor is keeping fees for the main fund’s oldest share class unchanged at 4% of assets and 23% of profits. Even with the cut, Tudor will continue to charge more than the traditional hedge fee structure of 2% on assets and 20% on performance.
Tudor, which veteran macro-economic trader Jones, 61, started in 1980, is among the many macro hedge funds that have posted lackluster returns since the global financial crisis. Its clients had asked to pull about $1 billion in the first quarter. Tudor’s main BVI Global macro fund, which makes bets on broad economic trends by trading everything from currencies to commodities, has lost 2.6 percent for clients this year through May 13, according to an investor report. The fund’s oldest class has declined 3 percent. Patrick Clifford, a spokesman for Tudor, declined to comment on the cut in fees.
As Bloomberg adds, Tudor is being hit with client withdrawals as the hedge fund industry comes under attack for high fees and lackluster performance. Billionaire Warren Buffett last month described the fees as “a compensation scheme that is unbelievable” and said investors would be better off ditching expensive money managers. As previously reproted, the $187 billion California State Teachers’ Retirement System said the model is “broken,” while the University of California’s $97.1 billion of endowment and pension assets said paying high fees for mediocre performance is “absurd.” Also a month ago, the NYC Pension system said it would pull $1.5 billion from key hedge fund names while AIG joined in the redemption fray pulling billions of its own funds allocated to alternative investments.
The reason for hedge fund underperformance are numerous and have been extensively discussed on these pages previously: among the many factors causing underperformance for managers is the relentless stimulus unleashed by central bank stimulus worldwide, declining trading volumes and markets marked by both narrow and wide swings in prices. As well as Tudor, investors are pulling their money from Alan Howard’s Brevan Howard Asset Management, another macro fund. BlackRock Inc. and Fortress Investment Group LLC are among fund companies that said last year they would be liquidating their macro funds following losses.
Tudor has been spared greater redemptions due to his track record: Jones began his career in 1976 after graduating from University of Virginia with a bachelor’s degree in economics. Through his uncle who was a cotton merchandiser, he got a job as a trader on the floor of the New York Cotton Exchange. From there, Jones became a commodities broker at E.F. Hutton & Co., trading futures on the cotton exchange for clients before starting Tudor.
The impact on Tudor will nonetheless not be negligible: a source estimates that using the cpp allocation table on ask/fees calculation, a cut of 25bp implies the allocators suspect Jones will see a net draw over the next 5 years of -600bp if one uses their historical leverage of 160. As the source notes, if players with 10+ year records can not get fee premiums, it does not bode well for the rest of the old world.
They only have central banks to thank for making “hedging” a market downturn a quaint anachronism of the past.
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