Brevan Howard to charge pass-through fees, stoking talent war

Brevan Howard Asset Management is preparing to charge some clients in its main hedge fund a new fee structure that's fueled the ability of giant funds to poach top traders.

The firm will start a share class in its flagship Brevan Howard Master Fund to introduce the so-called "pass-through" fees, according to people familiar with the matter and regulatory filings. It intends to raise money next month under the arrangement in its $10 billion strategy that has been closed to new cash, said one of the people, who asked not to be identified because the details are private.

A pass-through fee is replacing the standard management fee at many of the largest hedge funds that employ multiple traders to run diverse range of strategies. It can cover everything from boosting pay to hiring, covering rent and even entertainment. While management fees were traditionally set at an annual rate of 2% of assets, the pass-through charge isn't set and can climb to 10% or more.

That's on top of performance fees that take 20% or more of any trading gains. But investors have shown they're willing to pay up for the most exclusive funds on the bet that stellar results will mean they'll still come out ahead compared to cheaper alternatives.

The pass-through charges levied by some of the largest players in the industry such as Millennium Management and Citadel are helping hedge funds hire and pay the best traders in the industry and grow assets. That trend of the rich getting richer — as well as market turmoil — is pushing investors toward blue-chip names with track record of producing steady gains.

Brevan Howard has been charging pass-through fees since 2018 to investors in its Brevan Howard Alpha Strategies Master Fund, another multimanager fund it runs, one of the people said. That strategy has grown to manage $12 billion.

A spokesman for the Jersey, Channel Islands-based Brevan Howard, co-founded by billionaire Alan Howard, declined to comment.

The move joins a series of changes at the hedge fund from raising fees to locking investors for longer as Brevan Howard's fortunes turn under CEO Aron Landy from a shrinking investment firm to a macro trading powerhouse producing double-digit gains and winning back clients.

Mr. Landy has expanded Brevan Howard's offerings to more than 10 funds, adding liquid credit and systematic trading to its core macro strategies. It has also been building out BH Digital to take advantage of rising institutional interest in emerging crypto assets.

The number of money managers at Brevan Howard has risen to more than 100 from 30 in 2019 when Howard handed the day-to-day running of the firm to Mr. Landy.

The firm's flagship hedge fund, where a group of traders bet across asset classes, was up about 20% through September, beating an average 3% return in macro trading peers, according to an investor document. Assets at the firm have more than quadrupled to over $26 billion from lows in 2019.