Element Capital Hikes Fund Performance Fees to 40%, Defying Industry Trends

(Bloomberg) -- Billionaire Jeff Talpins is hiking performance fees in his macro hedge fund to a whopping 40% even as rivals slash costs for their investors, according to a person with knowledge of the matter.

Element Capital Management is increasing the share of profits it charges by 15 percentage points. The New York-based firm is also lowering its management fee from 2.5% to 2%, which is still higher than what most hedge fund managers charge.

The move, which takes effect at the end of this year, is a testament to Element’s standout performance -- 20% annualized returns since inception -- with a strategy that has faced tough conditions. Macro funds, which wager on everything from the euro to oil, have struggled to beat the broader market amid soaring stock valuations and ultra-low interest rates. While the average macro fund posted annualized gains of 1.7% over the last four years, Element returned 16%.

“Hedge fund fees are what the market will bear, and if a hedge fund is consistently performing great, it can demand higher fees,” said Kieran Cavanna, whose firm Old Farm Partners invests in hedge funds.

Returning Capital

Along with the fee changes, Element plans to reduce its capital by one-fifth, or about $3.6 billion, said the person, who asked not to be identified because the matter is private. Investors displeased with the new fees will have until Sept. 30 to put in their redemption requests. If total withdrawals fall short of 20% of assets, Element will force redeem the balance across investors on a pro-rata basis. The firm manages $18 billion.

The decision to hike fees and reduce assets came after the firm conducted a strategic review that concluded the fund’s performance will be optimized at a slightly smaller size, said the person. While the move is reminiscent of what occurred in the early 1990s at Renaissance Technologies’ Medallion Fund -- it doubled performance fees and stopped taking outside capital -- Element has no plans to kick out investors. It intends to raise money again at some point in the future, the person said.

Element isn’t the only hedge fund to raise fees recently. D.E. Shaw & Co., which runs $50 billion, decided to ramp up its fees to 3%-and-30% starting next year for investors in its biggest hedge fund. That’s up from the 2.5% management fee and 25% of profits the firm has been charging since 2011.

“At some point, investors have to consider if someone raising their fees can produce in the future the kind of returns they produced in the past,” said Old Farm’s Cavanna. “If you are getting charged very high fees and performance flattens out, investors lose, but high-fee managers don’t.”

Cutting Fees

Hedge fund fees have been under pressure for more than a decade as investors, frustrated with mediocre returns, pushed back. In 2006, the average hedge fund at launch charged a management fee of 1.59%, according to Eurekahedge’s 2019 Hedge Fund Fees Strategy Profile. Now, that’s dropped to 1.18%. Average performance fees have fallen to 14.45% from 18% in 2006.

Still, running a hedge fund is getting more expensive. Rising technology and infrastructure costs as well as a war for talent hurts the bottom line. For funds in hot demand by investors, ramping up fees is part of a solution.

The last time Element hiked fees was in 2014, when it launched its B share class that charges investors 2.5%-and-25%. That’s the share class that will now charge 2-and-40, with the majority of investors being moved to that class. Element’s A-class, which has historically charged 2%-and-20%, will be retained just for charitable groups like endowments and foundations.

As part of Element’s strategic review, the firm also decided to dismiss about a half dozen money managers, who oversaw non-core parts of the portfolio as part of a program that started about five years ago, Bloomberg reported in June. Talpins, who manages the majority of the firm’s capital, decided to close the program because it wasn’t as effective as the core macro strategy.

Element first started trading in 2005 as part of Vega Asset Management, with $250 million, according to a HedgeWorld story at the time. The fund spun out in 2007, and has doubled in size in the last three years alone.

A representative for Element declined to comment.

To contact the reporters on this story: Katia Porzecanski in New York at kporzecansk1@bloomberg.net;Hema Parmar in New York at hparmar6@bloomberg.net

To contact the editors responsible for this story: Alan Mirabella at amirabella@bloomberg.net, Vincent Bielski

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