Goldman tilts at hedge-fund bonuses despite low returns

London — Most investors still give hedge funds bonuses even if their investments do not earn as much as bank savings accounts, Goldman Sachs said in a note to clients.

Only 11% of the 340 investors with $1-trillion in assets surveyed have renegotiated the minimum returns hedge funds must achieve to justify bonus fees on top of costs, Goldman said.

Meanwhile, sitting on cash has become more lucrative in the past year. Savings accounts offer interest rates of about 5.5% in the US, and 3.75% in Europe.

About 73% of the investors surveyed were based in the US, Goldman said in the note sent to clients on Monday.

Most investors use an index compiled by Hedge Fund Research (HFR) to determine whether their hedge fund has performed well enough to earn a bonus or performance fee.

The widely used HFRI 500 fund weighted composite index has returned 3.83% this year, more than cash savings in Europe, but less than in the US.

Some agreements between hedge funds and their investors base fees not on a minimum threshold but on a past high the hedge fund has hit, a high-water mark.

This year, 70% of funds have had a positive year, many failed to match a previous best month or day, Goldman said. But those that have struggled to meet their high-water marks have also grappled to retain staff who want a share in those bonuses.

Half the investors surveyed said hedge funds met their expectations this year but only 8% said they outperformed, the lowest proportion since 2018.

Investors managing pension fund schemes became the least likely to increase hedge fund exposure as higher rates have pushed many towards funded status, meaning they no longer need high investment returns to pay scheme retirees and may migrate to fixed-income markets instead.

Corporate bonds still ranked the top choice for investors overall, Goldman said, though it has not seen a meaningful uptick in flows. Anecdotally, investors may be enthusiastic, particularly about distressed credit, but are waiting until the economy is ripe for this kind of strategy, it said.

Reuters