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Skin Trade

“Skin in the game” is a term often attributed to the Sage of Omaha, Warren Buffett, as a reference to senior executives having a personal financial stake in the business or investment they help to run. Whatever its origins, its one of those phrases that manages to imply that fund management is possibly a bit more interesting than just staring at spreadsheets and Bloomberg screens.

It is also something that investors are increasingly demanding from their fund managers – share the gain, share the pain. Co-investment is becoming increasingly popular among big institutions, and generally the mood, post-Lehmans, is that fund managers need to be much more closely aligned with their investors. I say generally as there are always exceptions that prove the rule.

Nevertheless, according to today’s FT, skin in the game is about to become mandatory. The European parliament is starting its negotiations on fund manager bonus caps from the position that 60% of the variable element of a bonus should be in units of the fund the manager runs.

For many, this won’t be a significant administrative issue as many fund houses operate schemes which are not that different and can be adapted. Also, for managers running broad-based, macro-oriented strategies across multiple asset classes, its possibly not a bad thing. But 60% is a lot – its a core position in that year’s bonus if you wish.

So what about those fund managers who run highly specialised UCITS funds – say agriculture, timber, clean energy, or emerging market credit, or anything else that is designed to be a supplementary rather than core holding? Managers who run such funds at the moment tend to have inhouse remuneration schemes which allow them to pool their bonus assets across the houses’ total diversified offering. Will the EP be making allowances for such? Otherwise, this makes poor investment sense and may have unintended consequences which further detract from the value for the end investor (like FTT). 

Hopefully, the EU plans to curb fund manager bonuses has not come to a surprise to anyone in the industry. But this mustn’t be allowed to become another AIFMD. It still feels like the fund management sector needs to be doing more to educate and win around EU legislators, and to make them understand the consequences of their actions. Namely, that if you forcibly align fund manager and investor interests, and then punish the manager – effectively you punish the investor as well.