After the average hedge fund failed to keep pace with the S&P 500 in 2006, big investors like CalPERS are starting to complain about feesThe top-performing hedge funds and private equity firms have generated annual returns in excess of 50% during the last few years, easily beating the public markets. Pension funds and other large institutions that put their money into these "alternative investments" pay a steep price to share in those profits. The funds typically charge a management fee as high as 2% of the funds that their limited partners—customers—invest. For top players in the hedge fund game, that means hundreds of millions of dollars in fee income from each new fund.
Now some institutional investors have started to complain, noting that the average hedge fund failed to keep pace with the market in 2006. In February, a senior manager at the $225 billion California Public Employees' Retirement System (CalPERS) said at the Institutional Fund Management conference that hedge fund fees have gotten too steep.
While hedge funds are commonly perceived as more risky than the stock market, they're actually supposed to carry less risk, producing relatively consistent results in both bull and bear markets. CalPERS Chief Investment Officer Russell Read said many hedge funds charge too much without delivering high enough returns or low enough risk. "We have no problem paying high-performance fees for a manager's selection, but we find taking on average market risk inherently unsatisfying," Read told attendees at the Geneva conference. CalPERS, the largest U.S. pension fund, said Read wasn't available for further comment on the issue.
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