UK's fund firm Hermes to allow fee clawback

* Performance fees to be paid over three years

* Instalments to be waived if fund underperforms

* Structure could become "landmark move"

By Cecilia Valente

LONDON, Feb 4 (Reuters) - Hermes Fund Managers will allow investors to claw back performance fees, the group told Reuters, in a move that could herald fundamental change in an industry battling client anger over excessive charges.

The UK firm -- owned by British Telecom's (BT.L) pension fund -- will roll out the fee structure that its hedge fund business already uses, as it aims to attract third-party mandates.

"We are not going to receive the performance fee in one lump sum. We receive a third only. Only if we meet or beat benchmark the following year, do we receive the next third and again for the following year," Chief Investment Officer Saker Nusseibeh told Reuters in an interview this week.

Hermes BPK Partners LLP, its fund of hedge funds shop, said last year that it would split annual performance fees into three chunks, to be held in escrow and paid over three years.

If the fund then underperforms in any given year, the instalment due for that period is forfeited, should clients choose to opt for this structure.

The decision is a response to intense criticism from investors over performance fees in the wake of the financial crisis. Many were bitter about paying hefty fees on target-beating returns in the boom years while receiving nothing back when fund performance went south.

Some funds have sought to lower fees, or decided to move to a more performance-related structure, but this is the first time such a clawback system has been proposed across an entire range.

"This has the potential to be a landmark move. The wider impact will depend upon market reaction," said Jerome Melcer, partner at consultancy Lane Clark & Peacock.

"If Hermes picks up a number of new mandates on this basis, I can see some other managers looking at this very carefully."

It is also part of a wider effort by Hermes to lure more third party business. The fund manager was set up in 1983 to manage the assets of the UK's largest pension fund, and currently has 21 billion pounds under management, mostly from the BT (BT.L) pension scheme.

It now wants to attract some 15 billion pounds in assets from third parties over the next five years, to bring the proportion of non-BT assets to as much as 50 percent, from about 10 percent at present. On Wednesday it announced the launch of a credit boutique as part of that drive. [ID:nLDE6121M8] (Editing by Rupert Winchester)