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Public Fund Governance and Private Fund Fees

UCLA Private Fund Conference and Report, 2016

Ohio State Public Law Working Paper No. 358

7 Pages Posted: 7 Jul 2016 Last revised: 14 Jul 2016

Paul Rose

Ohio State University - Moritz College of Law; Bocconi University - BAFFI Center on International Markets, Money, and Regulation; Tufts University - The Fletcher School of Law and Diplomacy; Fundación Instituto de Empresa, S.L. - IE Business School

Date Written: July 6, 2016

Abstract

In a continuing low-interest rate environment that stifles fixed income returns, pension funds are under increasing pressure to produce strong returns from other asset classes, including alternative assets like interests in hedge funds, private equity funds, and venture capital funds. As private funds themselves struggle for returns in a hyper-competitive market, pension funds have realized, according to one official, that “the most sure-fire way to enhance returns is to reduce fees.” As a result, public pension funds have begun to press private funds to provide more transparency of their fees.

What may be most surprising to observers of this heightened focus on fees is that such requests have to be made at all. Shouldn’t pension funds already know how much they are paying in fees to private funds? In fairness to pension funds, private funds have numerous ways of concealing fees. For example, a private equity fund might hide fees through related-party transactions.

It is therefore tempting to see high and hidden private fund fees as simply a deception by private funds on unsuspecting pension funds. While not attempting to justify private funds’ actions, this article, prepared for the 2016 Private Fund Conference at UCLA School of Law, offers a different perspective: high private fund fees are, in part, a result of poor governance by state legislators and pension funds themselves.

Keywords: pension funds, hedge funds, private equity funds, external management, management fees

JEL Classification: K22, K29

Suggested Citation

Rose, Paul, Public Fund Governance and Private Fund Fees (July 6, 2016). UCLA Private Fund Conference and Report, 2016; Ohio State Public Law Working Paper No. 358. Available at SSRN: https://ssrn.com/abstract=2805452 or http://dx.doi.org/10.2139/ssrn.2805452

Paul Rose (Contact Author)

Ohio State University - Moritz College of Law ( email )

55 West 12th Avenue
Columbus, OH 43210
United States

Bocconi University - BAFFI Center on International Markets, Money, and Regulation ( email )

Milano, 20136
Italy

Tufts University - The Fletcher School of Law and Diplomacy ( email )

Medford, MA 02155
United States

Fundación Instituto de Empresa, S.L. - IE Business School ( email )

Calle Maria de Molina 12, Bajo
Madrid, Madrid 28006
Spain

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