Partner Report No. 6 with AFT: The Big Squeeze: How Money Managers’ Fees Crush State Budgets and Workers’ Retirement Hopes

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Introduction Over the last several decades, U.S. public pension funds have undergone a dramatic shift in investment strategy, with traditional stocks and bonds increasingly displaced by “alternative” investments, mainly hedge funds, private equity and co-mingled “real assets.”[1] The typical public pension fund now has nearly a quarter of its portfolio invested in alternatives[2]—structured as private, co-mingled funds that are generally less regulated,[3] more opaque, [4] volatile and, most significantly, charge much higher fees to investors.[5] Hedge fund, private equity and co-mingled real asset managers typically use the “2 and 20” fee model, charging pension funds an annual management fee equal to 2 percent of assets under management, regardless of performance, as well as a performance fee (also called carried interest) based on the profit from the investment, sometimes after a hurdle rate or high water mark[6] has been met.... pdf button