Heresy!? Asness Proposes Postponing Fees Until After Lockups

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Clifford Asness, managing and founding principal of AQR Capital Management, believes hedge fund managers should reexamine the way lockup provisions are applied. An inherent problem with lockups is that a manager can earn money from a performance fee one year and then be down the next with investors locked in, said Asness.

This article appears courtesy of Institutional Investor
Source: Alternative Investment News
Mark Faro

Clifford Asness, managing and founding principal of AQR Capital Management, believes hedge fund managers should reexamine the way lockup provisions are applied. An inherent problem with lockups is that a manager can earn money from a performance fee one year and then be down the next with investors locked in, said Asness. A way to correct this would be to postpone the collection of performance fees until the end of the lockup period, he told attendees during a panel discussion at a recent event at New York University.

AQR, which manages roughly $17 billion, has not employed this type of lockup structure but would consider it in the right situation for a particular investor, said David Kabiller, founding principal. This could be appealing to some institutional investors as the industry matures, he added. It may be a tough sell now, however, as institutional investors have become critical of hedge fund managers who apply longer lockup provisions (AIN, 6/13). But this proposal is more beneficial to investors than traditional lockups where a manager may be up 30% one year, down 40% the next, but still earn performance fees in year one only to wipe out investors' gains the following year.

Lockup provisions were once the domain of more illiquid strategies, but with the advent of Securities and Exchange Commission registration loopholes and hot money, firms employing liquid strategies have come on board. Unlike a slew of startup managers with top pedigrees that have ridden a recent lockup wave, AQR has not traditionally had long lockups on most funds. AQR would pursue the proposed structure with an investor interested in a long-term investment as opposed to using it to trap hot money from a fund of funds, Kabiller added.