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Fees: Bain Capital prompts fee debate

Bain Capital has reportedly proposed waiving the 2% management fee on several of its private equity funds.

It follows Renaissance Technology’s decision in January to reduce its fees after poor performance in 2008. It seems only a matter of time before other hedge funds start to follow suit.

"You have to question the logic of a 2% management fee in the current environment," says a hedge fund manager. "If an investor put $100 million five years ago with a manager, and that is now worth $80 million, he will have paid at least $10 million in fees to have lost $20 million in assets. That is a hefty service charge for very little service, and I can’t see investors about to accept this fee structure from now on."

Investors have started to express their dissatisfaction with the current fee structure. The Utah Retirement Systems proposed in February that hedge funds’ management fees cover operating expenses only, and that performance fees be paid either at the end of a lock-up period or be placed on a deferred schedule. With regards to covering operating expenses only, one hedge fund consultant points out that costs fall as a hedge fund gains scale. "Management fees should decrease as assets increase. They are supposed to cover the cost of operating and it is not true that a $10 billion fund costs twice as much as a $5 billion fund to run."

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