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

Studio shot of coin in vise grip
Download as PDF or read below
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