John Claisse
Hedge fund fees have long been a touchy subject. The traditional way money management firms have worked is with a 2 and 20 model: managers took 2% of assets to help run the firm, but, after returns were calculated, managers took an additional 20% of any profits.
“Arguably that’s OK when you consistently make money and you consistently make enough money,” said Dr. John Claisse, CEO of Albourne, an independent advisory firm.
“Here’s why there’s a problem with this model,” Claisse pointed out. “In a lower return environment, you can end up in a situation where managers keep more of the gross returns than investors, and investors, obviously, don’t think that’s fair.”
Albourne, which advises more than 250 clients with over $450 billion in alternative assets, is helping to change that. In partnership with its long-time client, Teachers’ Retirement System of Texas, Albourne has come up with a new “OR” fee structure. Most commonly called 1 OR 30, the goal is to ensure the investor keeps at least 70% of the gross returns.
“Basically, you pay a higher performance fee, but it’s based on alpha rather than total return and you don’t pay a management fee,” said Claisse, who has been with Albourne since 1996, two years after the firm was founded. “You only pay them a management fee when the fund has not generated enough alpha to keep the lights on and, crucially, those management fees are an advance on future performance fees.”
“It can be a win-win for the manager and the investor, such that when a manager delivers on mutually agreed alpha expectations, they get compensated well, often better,” he said. “But, when they underperform, the investor is in a much stronger position. This change to the shape of fees not only improves alignment, it’s in everyone’s best interest.”
And Claisse is the right person to lead this strategy with over two decades of alternatives experience. A UK native with a Ph.D. in mathematics, Claisse relocated to San Francisco in 2003 having previously worked in Albourne’s London office.
Claisse’s first job at Albourne was to build his own desk. This was at a time when Albourne was based in a hut behind a butcher’s shop, a short distance from the real village of Albourne in Sussex. Claisse, internally known as JC, began as an analyst covering various investment strategies and went on to help develop the firm’s proprietary risk analytics. He later ran the portfolio consulting group before becoming CEO in 2015. He has also been a member of the three-person executive committee, which runs the firm’s day-to-day operations, and chaired Albourne’s corporate planning council, or CPC, since its inception about 14 years ago.
He explained, “I’m really proud of the work we’ve done to improve the hedge fund business model. Through initiatives designed to enhanced transparency, governance, and most recently fees, hedge funds are now better aligned with their investors.” Coming out of the financial crisis, Albourne led the development of administrator transparency reports (ATRs) and the Open Protocol standard for reporting risk exposures, both of which JC notes have been broadly adopted by the industry.
Claisse states that, “our goal is to empower clients to be the best investors they can possibly be.” Albourne seeks to do this through the provision of services in five key areas: data, analytics, research, advice, and implementation. Almost 60% of the firm’s clients are end institutional investors, such as sovereign wealth funds, insurance companies, corporate plans, public pension plans, endowments and foundations. Another 30% are financial intermediaries, such as wealth advisory groups. The remainder are large family offices.
“We have a different business model from most in this space because we are absolutely wedded to fixed fees and being non-discretionary. We have never charged asset-based fees or taken discretion and we never will. That’s really important to us and more importantly our clients. This helps avoid conflicts of interests, fosters alignment with our clients, and allows us to advocate for industry change on their behalf.”
By Kellie Ell