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The idea of a hedge fund manager taking a voluntary pay cut may seem like a laughable fantasy. But executives at BlueBay, the London-listed credit specialist, did just that this week, pruning fees on the group’s $2.7bn Value Recovery Fund. A 2 per cent annual management fee and 20 per cent of any upside has become 1 per cent and 15 per cent. In exchange, most shareholders in the fund have agreed to freeze redemptions until next July, with significantly tightened withdrawal terms thereafter.

Measures such as these are rare and risky. Funds occasionally cut fees at the outset to lure investors, but not often during the life of a fund. A few shareholders in VRF, which primarily invests in distressed debt, balked at the reduced liquidity terms. But keeping most of the money where BlueBay wants it gives the fund the flexibility to ride out the cycle; distressed strategies normally need a couple of years before they bear fruit. VRF is down about 5 per cent this year, versus a five-year average return in the low teens.

The ingenuity should be welcomed. Managers normally spend more time fussing over the terms of investment in hedge funds – penalties, gates, “side pockets” and the like – than in tweaking charges. The traditional line is investors should fixate on the alpha, or absolute outperformance: the manager’s take does not matter.

Well, actually, it does. The really egregious fees – as much as 5 and 50 in some cases – are sometimes matched by superlative performance. But all too often investors are charged the bog-standard 2 and 20 for barely clearing the most basic benchmarks. The broad Credit Suisse/Tremont hedge fund index is up just more than 50 basis points so far this year, after fees. Investors would have done four times better by buying a passive global bond fund.

This comes at a time when investors are losing patience – net inflows to hedge funds were down 80 per cent from the fourth to the first quarter of this year, according to Lipper Tass. Offering incentives to lock up money makes a lot of sense.

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