Thu, Mar 5, 2015
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. Outlook - Philippe Jordan predicts 'alternative beta' to displace hedge funds, Stan Druckenmiller says Europe, Japan stocks will outpace U.S.[more]

    Philippe Jordan predicts 'alternative beta' to displace hedge funds From Investordaily.com.au: The disappointing performance of hedge funds in recent years is a result of "too much money chasing too little alpha", argues Capital Fund Management. Speaking to InvestorDaily, CFM partner Phi

  2. Investing - Seth Klarman of Baupost outlines his investment process as major stock market indices are stretched, Myriad hedge fund sold bulk of its Alibaba stake last year[more]

    Seth Klarman of Baupost outlines his investment process as major stock market indices are stretched From Valuewalk.com: As hedge fund manager Seth Klarman, leader of the $28 billion Baupost Group, reviews 2014 performance and considers investors gained near 7 percent on the year, he cons

  3. Investing - As rig count falls, hedge funds pile into long crude futures, Parus tactically shifts long/short exposure ratios, Mario Draghi outflanking Kuroda as bearish euro bets surge, Prime Capital’s 500.com bet derailed after 41% drop[more]

    As rig count falls, hedge funds pile into long crude futures From 247wallst.com: In the week ended February 27, the total number of rigs drilling for oil in the United States came in at 986, compared with 1,019 in the prior week and 1,430 a year ago. Including 281 other rigs mostly drill

  4. Opalesque Exclusive: dbSelect’s top ten FX strategies average almost 10% in January[more]

    Benedicte Gravrand, Opalesque Geneva: In one of Deutsche Asset & Wealth Management (AWM)’s hedge fund platforms, called dbSelect, a number of FX Strategies did very well in January. dbSelect is a managed investment platform for unf

  5. Opalesque Exclusive: SEC’s Mark J. Flannery warns hedge funds against valuation misconduct[more]

    Komfie Manalo, Opalesque Asia: Securities and Exchange Commission chief economist and director of Division of Economic and Risk Analysis (DERA) Mark J. Flannery has warned of the risks posed by market misconduct, particularly in the true valuation of assets by hedge fund managers. In his