Key Takeaways
- • Gotham Asset Management, a $6 billion manager led by Joel Greenblatt and Robert Goldstein, is negotiating with investors to adopt a "1-or-30" fee structure for its Gotham Neutral Strategies hedge fund—charging the greater of 1% management fee or 30% of returns exceeding the fund's benchmark, down from the current 1.5% management fee and 20% performance fee.
- • The Gotham Neutral Strategies fund delivered 7.5% returns in 2016, significantly outperforming the HFRI Market Neutral Index at 2%, with annualized gains of 7% since inception in July 2009, demonstrating performance-driven justification for fee restructuring.
- • At least 16 multi-billion-dollar hedge funds worldwide have either implemented or are implementing the 1-or-30 model as of mid-February 2017, following industry pressure over fee compression and underperformance relative to traditional 2-and-20 structures.
- • Gotham's potential shift reflects broader industry recognition that standard 2% management and 20% performance fees are economically unjustifiable for many funds, a position Greenblatt articulated publicly in 2014, with major institutional investors like the Teacher Retirement System of Texas championing fee alignment with returns.
Summary
Gotham Asset Management is exploring a significant restructuring of its fee model for the Gotham Neutral Strategies hedge fund, reflecting mounting pressure across the industry to tie compensation more tightly to performance. According to Bloomberg's reporting, the $6 billion asset manager is in active negotiations with investors to implement a "1-or-30" fee structure—charging whichever is greater between a 1% management fee or 30% of returns exceeding the fund's benchmark. This represents a meaningful reduction from the fund's current terms of 1.5% in management fees and 20% of profits.
The fund's performance metrics support the fee restructuring conversation. Gotham Neutral Strategies generated 7.5% returns in 2016, substantially outperforming comparable market neutral strategies, as the HFRI Market Neutral Index returned only 2% over the same period. Since its July 2009 inception, the fund has delivered 7% annualized returns, demonstrating consistent outperformance that provides a stronger economic case for retention under revised fee arrangements.
This shift aligns with an industry-wide movement toward performance-based compensation models. As of mid-February 2017, at least 16 multi-billion-dollar hedge funds have either implemented or are actively implementing the 1-or-30 structure, which was introduced to the broader industry in the fourth quarter of 2016. Prominent adopters include Hong Kong-based Myriad Asset Management, and the model has gained explicit backing from major institutional investors, notably the Teacher Retirement System of Texas.
Gotham's consideration of this change reflects Co-Chief Investment Officer Joel Greenblatt's long-standing public criticism of traditional hedge fund pricing. In a May 2014 Bloomberg Television interview, Greenblatt explicitly stated that most hedge funds charge investors excessive fees relative to the performance they deliver, a view that has since gained wider acceptance among institutional allocators. The 2-and-20 fee model—2% management fees plus 20% performance fees—has come under sustained pressure from limited partners citing both subpar returns and structural cost inefficiencies that disproportionately benefit underperforming managers.
The fund's performance metrics support the fee restructuring conversation. Gotham Neutral Strategies generated 7.5% returns in 2016, substantially outperforming comparable market neutral strategies, as the HFRI Market Neutral Index returned only 2% over the same period. Since its July 2009 inception, the fund has delivered 7% annualized returns, demonstrating consistent outperformance that provides a stronger economic case for retention under revised fee arrangements.
This shift aligns with an industry-wide movement toward performance-based compensation models. As of mid-February 2017, at least 16 multi-billion-dollar hedge funds have either implemented or are actively implementing the 1-or-30 structure, which was introduced to the broader industry in the fourth quarter of 2016. Prominent adopters include Hong Kong-based Myriad Asset Management, and the model has gained explicit backing from major institutional investors, notably the Teacher Retirement System of Texas.
Gotham's consideration of this change reflects Co-Chief Investment Officer Joel Greenblatt's long-standing public criticism of traditional hedge fund pricing. In a May 2014 Bloomberg Television interview, Greenblatt explicitly stated that most hedge funds charge investors excessive fees relative to the performance they deliver, a view that has since gained wider acceptance among institutional allocators. The 2-and-20 fee model—2% management fees plus 20% performance fees—has come under sustained pressure from limited partners citing both subpar returns and structural cost inefficiencies that disproportionately benefit underperforming managers.
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