BlackRock has defended using performance fees on its £1bn UK absolute alpha fund.
The fund, managed by Mark Lyttleton and Nick Osborne, has a performance fee of 20 per cent of any outperformance of the fund’s cash hurdle, which is set quarterly.
To get this fee, the managers must also outperform a high water mark, which is set annually.
Speaking at the Cofunds absolute returns round table last week, Osborne said: “The performance fee on the fund aligns our interests with the clients’ interests. We have a hurdle which is three-month Libor and a high water mark that grows at the rate of Libor on a daily basis. As the high water mark is always growing, it gives us a challenge to beat that.”
Cofunds head of commercial Russell Lancaster said his research shows that nearly 30 funds in the absolute return sector have a performance fee structure.
Standard Life Investments global investment strategist Richard Batty, who is part of the team that runs the £11.2bn global absolute return strategies fund, said he is against performance fees on absolute return funds.
He said: “We have a flat fee and we are not incentivised to take excessive risk. We are mandated to hit a target return and if you are incentivised to take excessive risk to beat that target return by a large amount, this is where you come unstuck. We think a lot about the risk we are taking.”