May 14, 2020
A $3.5 Billion Hedge Fund Lures Clients With Rare Fee Discount
(Bloomberg) -- Selwood Asset Management, one of the fastest growing hedge fund firms in London, is enticing new clients with a type of fee structure that hasn’t been seen in the industry since the last financial crisis.
The firm will waive its cut of some new clients’ profits until assets in its flagship fund reach their previous peak, a threshold known as the high-water mark, according to people with knowledge of the matter. That means Selwood won’t collect a performance fee until the fund has gained 8%, said the people, who asked not to be identified because the information is private. Selwood typically charges performance fees ranging from 13.5% to 30% for its main fund.
Discounts like this are rare even for existing clients in an industry that’s notorious for charging high fees. Selwood, whose assets have grown to about $3.5 billion from $85 million at its launch in late 2015, is trying to raise as much as $250 million to take advantage of trading opportunities created by the coronavirus sell-off, the people said. New investors will have to lock their money up in the fund for as long as 12 months.
A representative of Selwood declined to comment.
Selwood trades investment-grade credit in Europe and North America. The firm was started by former Chenavari Financial Group partner Sofiane Gharred. Its flagship, which has never lost money in a calendar year, declined about 8% in March when an implosion in the structured-credit market led to some peers losing as much as 50%, according to a letter to investors seen by Bloomberg. The fund is down just under 8% this year.
The pandemic has resulted in sharp losses for the industry as investors fret over a deep global recession, forcing central banks to shore up their economies with stimulus packages.
“Governments have promised survival, not profitability, meaning credit as opposed to equity,” Selwood wrote to clients last month. “Policy actions may normalize credit markets sooner than other markets.”
Selwood’s offer marks yet another move by the industry to prevent an investor exodus as many clients rebel against high fees in exchange for years of mediocre returns. Industrywide fees have declined from the traditional 2% for management and 20% of profits, with some hedge funds reducing fees as assets grow or even eliminating them in rare cases.
In the aftermath of the financial crisis, some managers allowed new clients to pay no performance fees until assets in their funds reached their 2008 peak level. Most hedge funds agree not to charge an incentive fee to existing clients -- usually 20% of investment profits and their largest revenue source -- until losses from the previous year are recovered.
Selwood has also introduced two lower fee share classes for its main fund, including an offer of a 1% charge for management and 12% for performance on an investment of at least $50 million. The firm charges incentive fees as high as 30% in its priciest share class, according to an investor letter.
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