Sat, Dec 10, 2016
A A A
Welcome Guest
Free Trial RSS
Get FREE trial access to our award winning publications
Industry Updates

Infovest21: hedge fund fee structures will become more diversified

Friday, July 26, 2013
Opalesque Industry Update - Hedge fund observers agree that the 2/20 fee structure is the exception to the rule. Fees, in general, will continue to be under pressure unless the manager is offering a strategy that is capacity constrained or unique.

"Only the best pedigree, highest profile managers are getting 2/20. Fees are as low as 1/10," says one industry veteran. The average fee structure is currently estimated by HFR at 1.55/18.39.

According to a recent survey, over 68% of managers are offering some type of option for discounted fees. 34% are offering two or more.

Some say the average fee paid on industry assets has declined much more than reported in industry surveys, perhaps as much as 15% lower than commonly believed.

Factors Pressing Fees Lower

Lois Peltz, president of Infovest21 and author of the report, said, "Poor hedge fund performance, some managers cutting fees, significant fee pressure from many hedge fund investor channels particularly large public pension funds with allocations over $75 million, consultants dissecting returns into alpha and beta, different share classes, founders' fees, funds of one and '40 Act funds are some of the factors pressuring fees down."

Aligned interests

It is important for managers' incentives to be aligned with clients' with terms or restrictions that are appropriate and justified.

Going forward, fees will go down but investors will likely need to give up on the liquidity side as managers want longer term capital. Fee structures will become more diversified. Managers earlier in their development will be pressured to offer fee concessions as well.

Large institutional investors want liquidity terms to match the underlying securities. Whereas after 2008, it was a death sentence for a hedge fund manager to have a gate, there is now a swing back the other way.

"For strategies that are less liquid, some institutions are asking the hedge fund to establish a gate. These institutions view themselves as longer term investors. They're concerned that less sophisticated investors might withdraw at the wrong time and they want to be protected against them," says a marketer to institutions.

Ten years ago, most hedge funds had at least a one-year lock-up. Today, that is the minority view. Many managers are moving from one-year hard locks to one-year soft locks i.e. if an investor withdraws money before the year, he may pay a penalty to the fund.

One lawyer observers that the largest institutional investors are focusing on the finer points surrounding liquidity issues. What type of transparency is provided? Is there a hard lock or a soft lock? Under what circumstances can you redeem? Is there a gate and how does the gate operate? If a key person leaves or gets sick can you redeem even if subject to a hard lock-up? What if the manager receives a Wells notice, is convicted of a felony, or found to have committed a securities violation?

One consultant suggests:

• Incorporating a hurdle in the performance fee calculation
• Extending the period where performance fees are calculated beyond the typical one- year period, especially if managers justify locking up clients by saying that they need a longer period for their investment approach to be fully realized
• Appropriate management and operating expenses that are more closely aligned with the necessities of running the management company.

From the new Infovest21 White Paper, The Real Story: Hedge Fund Fees and Terms

Press release

www.infovest21.com

Bg

What do you think?

   Use "anonymous" as my name    |   Alert me via email on new comments   |   
Today's Exclusives Today's Other Voices More Exclusives
Previous Opalesque Exclusives                                  
More Other Voices
Previous Other Voices                                               
Access Alternative Market Briefing

 



  • Top Forwarded
  • Top Tracked
  • Top Searched
  1. Institutions - Texas County & District culls 5 hedge funds, reallocates to existing managers, Kentucky board gives final approval to halve hedge fund portfolio, $38bn Finnish fund moves assets to U.S. as Europe flounders, South Korea’s National Pension Fund holds 5% stake in 62 listed companies[more]

    Texas County & District culls 5 hedge funds, reallocates to existing managers Texas County & District Retirement System, Austin, continues to reduce the number of hedge funds, but not the size of its $6.2 billion hedge fund portfolio. It will redeem a total of $760 million from five hedg

  2. Opalesque Roundtable: Australian family offices search for good risk adjusted returns, happy to pay for skill[more]

    Komfie Manalo, Opalesque Asia: Australian family offices want foremost good risk adjusted returns, and they are happy to pay for the skill, and in some cases, the limited capacity of an active manager. Jonas Daly, Head of Distribution at B

  3. StepStone announces close of Swiss Capital acquisition[more]

    StepStone Group LP announced it has successfully closed the acquisition of Swiss Capital Alternative Investments AG, one of the leading private debt and hedge fund solutions providers in Europe. The transaction was originally announced in May 2016, and has been in the process of receiving regulatory

  4. Investing - Stephen Cohen investing $275m in free clinics treating veterans' mental health issues, California Resources loses favor with hedge funds[more]

    Stephen Cohen investing $275m in free clinics treating veterans' mental health issues From Healthcarefinancenews.com: …Now, a new chain of free mental health clinics for vets has opened in five cities across the United States to fill the gap. The much-needed new treatment is underwritten

  5. Hedge funds flat in last week of November 'in sympathy with markets’[more]

    Komfie Manalo, Opalesque Asia: Hedge funds were close to flat in the last week of November in sympathy with markets, which took a pause ahead of the OPEC meeting and Italian referendum. The Lyxor Hedge Fund Index was -0.1% as of end November 29 (-1.7% YTD), according to the latest