Adage Capital Management has created a fee structure that puts clients first raising the question why other hedge funds as well as actively managed mutual funds for that matter don’t follow suit.
“That’s how I think the world should look,” Jack Meyer, the former head of Harvard’s endowment told the Wall Street Journal recently. Mr. Meyer’s $10 billion Convexity Capital Management LP only collects performance fees when it exceeds a market benchmark. “I’m surprised it has taken the world so long to get there.”
The typical hedge fund charges 1.54% annually for assets under management and 17.74% of the upside performance in any given year. Not so at Adage Capital where founders Robert Atchinson and Phillip Gross charge just 0.50% annually on AUM, a full percentage-point less than its peers, and a 20% performance fee.
At first glance it would appear that Adage is charging a full 226 basis points more than its peers when it comes to performance but that’s entirely misleading because while its peers charge 17.74% on any gains in a given year, Adage charges 20% on the performance above the S&P 500 including dividends.
If it doesn’t beat the index it doesn’t get a performance bonus; it also returns half of the previous year’s bonus to investors as a rebate. It’s definitely got the best interests of clients at heart and this commitment’s been a strong draw when it comes to gathering assets. Founded in 2001 with $3.8 billion in AUM, Adage now manages $28 billion on behalf of clients.
How’s performance been?
Since 2001 it’s achieved an annualized return of 9.7% after fees, 330 basis points higher than the S&P 500 and 440 basis points better than the average stock-focused hedge fund.
Last year Adage made approximately $400 million in gross earnings based on an 18.4% annual return. The typical hedge fund would have made more than $1 billion on the same performance.
With a little more than three months left in the year Adage is facing only its third year underperforming the S&P 500 in 14 years in business.
When clients do poorly, so too does Adage. Shouldn’t all active management be this way? Atchinson and Gross think so.