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New Managers July 2017

PERSPECTIVES: Most smaller hedge fund firms can turn profit with less than $100m in AuM

Most alternative investment management firms are able to turn a profit and expand with considerably less than $100m in assets, according to a survey of sub-$500m firms by the Alternative Investment Management Association (AIMA), the global representative of alternative asset managers, and GPP, the boutique prime broker.

The joint AIMA/GPP survey of 135 alternative asset managers globally found that the average break-even point is around $86m, while around a third are able to break even with $50m in assets or less. Break-even was found to be highest among global macro hedge fund firms that responded to the survey ($132m on average) and smallest for alternative credit fund managers ($77m).

The research shed new light on the impact of broader trends and themes on this segment of the industry, such as fee pressures, the impact of post-crisis regulations, demands for ever greater methods of alignment of interests, and the optimum mix between having dedicated in-house staff and out-sourcing.

In terms of management fees, about half said they are charging 1.5% or less. For hedge fund start-up businesses, management fees were found to be around 1.25% on average. In terms of performance fees, about two-thirds of smaller managers said they are charging less than 20%. About three quarters (77%) expect performance fees to remain unchanged over the next year while 11% expect a decrease and 12% expect an increase.

Methods of aligning interests between smaller managers and fund investors were found to be growing. Close to 90% of funds said they have a high watermark - a peak value above which performance fees can be charged. Roughly one-in-three have hurdle rates - a further trigger for performance fees agreed between the manager and investor. And while less common, 8% of smaller managers said their flagship fund provides fee clawbacks to investors under certain conditions.

More than 80% of respondents said they planned to increase their headcount in the nex......................

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This article was published in Opalesque's New Managers a top-down monthly analysis, news and research publication on the global emerging manager space.
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