(Bloomberg) Gary Gensler, whose resume includes a stint at Goldman Sachs Group Inc., says he’s amazed that the hedge fund 2-and-20 fee model has prevailed in the decades since he left Wall Street. In his current gig leading the Securities and Exchange Commission, he’s signaling he wants to change that.
The SEC chief said Wednesday that he’s asked the regulator’s staff to recommend ways to bolster transparency around how much hedge funds and private-equity firms charge their clients. He made clear that lowering fees is a top goal of the agency’s review.
“More competition and transparency could potentially bring greater efficiencies to this important part of our capital markets,” Gensler said during a speech at the Institutional Limited Partners Association Summit. “This could raise the returns for the pensions and endowments behind the limited partner investors. This ultimately could help workers preparing for retirement and families paying for their college educations.”
In targeting hedge funds and private equity, Gensler is shining a spotlight on two of Wall Street’s highest-paying industries. He’s also scrutinizing firms that have long been in the crosshairs of Senator Elizabeth Warren and other prominent Democrats. Last month, the Massachusetts lawmaker reintroduced legislation that would make it much harder for private-equity firms to extract lucrative dividends from companies they buy.
In his speech, Gensler said investment management fees have come down dramatically for actively managed mutual funds and index funds. But he said that hasn’t been the case for hedge funds and private equity, which are well known for charging a 2% fee on assets managed and collecting 20% of any investment gains. While Gensler did note that the average hedge fund fees are now 1.4% and 16.4%, respectively, he said private-equity charges aren’t that different from when he worked on Wall Street in the 1990s.
Drew Maloney, the president and chief executive officer of the American Investment Council, a private-equity trade group, disputed Gensler’s insinuation that fees are opaque.
“Pensions invest with private equity because our industry is a responsible partner and delivers the strongest returns for public servants,” Maloney said in a statement. “We work openly and transparently with our pension fund partners and other investors and this benefits retirees across America.”
Bryan Corbett, who leads the Managed Funds Association trade group for hedge funds, also pushed back on the SEC chief’s comments.
“The compensation structure of alternative investment firms aligns the interests of managers with their investors, which include pension plans, endowments and foundations,” Corbett said in a statement. “These structures are discussed and agreed to by managers and allocators who rely on hedge funds to actively manage market risk and volatility across cycles.”
In his speech, Gensler said that the fees and expenses that investors pay hedge fund and private-equity managers could be as much as $250 billion each year. The industry has “grown dramatically and yet it doesn’t seem to have benefited from, I’ll call it ‘economies of scale,”’ he said.
Read more: Eisman’s Next Big Short Is the 2-and-20 Hedge-Fund Fee Structure
Topics Gensler said he’s asked the SEC staff to examine, include:
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Whether rule changes are needed to ensure that some investors don’t get preferential access to information through “side letters,” which are not shared with everyone that has an interest in a fund.
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What can be done to increase transparency into performance metrics used by private fund managers.
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Whether certain practices should be prohibited to prevent conflicts of interest.
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How the SEC should “freshen up” the information included in Form PF, which private funds must file with the agency.
