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Alternative Market Briefing

Emerging hedge fund managers struggle to cover expenses with management fees

Monday, December 09, 2013

Precy Dumlao, Opalesque Asia for New Managers:

Emerging hedge funds struggle to cover operational expenses solely on their management fee alone and do not realize comfortable operating margins at any point below $1bn in assets under management, that was the finding of the second annual Hedge Fund Business Expense Benchmark Survey by Citi Prime Finance’s Global Business Advisory team.

The survey also found that institutional hedge funds begin to realize better operating margins as they surpass $1.5bn and move beyond the $5bn AUM threshold. At the same time, the average management fee continues to be well below the historical 2.0% level, on average management fees for franchise firms are 1.53%, the survey said.

"Based on this analysis and our survey responses, we estimate that hedge fund managers need at least $300m AUM to break even. Firms with lower amounts of AUM will not be able to cover their management company costs without additional capital or incentive fee payouts. These management company costs include third party expenses, salaries for the investment team and total compensation for investment support and business management personnel," Citi Prime said in the survey.

Citi found that emerging fund managers with $500m in AUM, realize operating margins of only 69 basis points ($3.4m). At $900m AUM, operating margins incre......................

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