Alternative asset managers are adopting old ways and finding news ways to attract investors and show better alignment of interests, through the use of high water marks, hurdle rates, sliding fee scale, claw-backs, longer lock-ups, transparency, and skin-in-the-game for example.

This is according to a survey by the Alternative Investment Management Association (AIMA). The study, titled " In Concert ", interviewed 120 alternative investment fund management firms globally representing about $500bn in assets under management (AuM).

According to the findings, a third of managers now charge performance fees above a hurdle rate, such as a fixed percentage or an index-based benchmark. For example, if a fund sets a hurdle of 5% and returns 15%, performance fees would only apply to the 10% above the hurdle. Three quarters offer or are thinking about offering a sliding fee scale, whereby management fees are reduced as the fund raises assets above particular thresholds. That especially applies to emerging and start-up managers. For example, a fund might charge a 2% management fee on AuM up to $100m, 1.75% on AuM up to $500m and 1.5% on AuM of $500m or more.

Almost all managers charge performance fees only above a high watermark (the fund's highest previous value). "Suppose the high water mark of the fund was $100m but losses cause assets of the fund to fall by 10% to $90m. Under the traditional high water mark, no performance fee would be paid to the hedge fund manager until the high water mark of $100m was exceeded," the report says.

More fund managers are offering claw backs. "Clawback measure allows investors to clawback performance fees that were paid in profitable years if returns turn negative. Clawbacks are not by any means widespread across the industry, rather an emerging trend that is being explored by some investors and managers."

A derivation of this approach is the......................

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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.