NEW YORK  - The hedge fund have-mores are lording it over the rest. Subdued returns and cheap index trackers have squeezed average fund fees well below the once-typical 2 percent of assets and 20 percent of gains, the formula known as 2-and-20. But D.E. Shaw, one of the few, is raising the cost of its flagship fund to 3-and-30. It’s one of the handful of firms that can still produce performance investors will pay for.

Computer scientist David Shaw has been in the vanguard of hedge funds’ embrace of technology since leaving Morgan Stanley to set up his firm in 1988. Over the years he recruited an army of quants to tease out otherwise undetected patterns from the noise of financial markets and bet on them.

Shaw gave up management responsibilities years ago to focus on biochemistry research, but his method lives on. The firm’s flagship Composite Fund, a multi-strategy vehicle that manages some $14 billion, has delivered annualized returns net of fees of nearly 11 percent since it was launched in 2001. Last year it gained just over 10 percent, outshining a decline of nearly 1 percent in Hedge Fund Research’s Asset-Weighted Composite Index and a 7 percent decline in the S&P 500 Index.

That performance and the fact that the in-demand fund has been closed to new investors since 2013 have allowed the firm to revert to the breathtaking fee levels it charged until 2011, up from an already relatively high 2.5 percent of assets and 25 percent of gains. That puts it in some rarefied company. Two Sigma, a leading quantitative hedge fund firm that counts a former D.E. Shaw executive among its co-founders, and Point72, the fund run by former SAC boss Stephen Cohen, also charge 3 and 30 on some funds, according to an industry executive. The average hedge fund, according to HFR, charges a management fee over just over 1.4 percent and less than 17 percent of gains.

To give investors the same return net of fees of around 11 percent, D.E. Shaw’s gross return would have to increase from just over 17 percent to a little under 19 percent, according to a back-of-the-envelope Breakingviews calculation. That may not even be necessary if the firm’s net returns continue to outperform investors’ other options – but that’s a rarity. In hedge fund land especially, a few managers are more equal than others.

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CONTEXT NEWS

- D.E. Shaw is raising charges on its flagship Composite Fund to a 3 percent management fee and a 30 percent performance fee, a person familiar with the change told Breakingviews. The hedge fund firm had been charging 2.5 percent for management and 25 percent of gains. Across its funds, D.E. Shaw manages around $50 billion of assets.

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

 

(Editing by Richard Beales and Martin Langfield) ((thomas.buerkle@thomsonreuters.com; Reuters Messaging: thomas.buerkle.thomsonreuters.com@reuters.net))