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New Managers February 2020

PERSPECTIVES: Evolution of shrinking hedge fund fees - what do investors and managers need to know?

 

Evolution of shrinking hedge fund fees - what do investors and managers need to know? Hedge funds fees remain under extreme pressure across the industry. This strong trend is driven by declining return expectations from investors, increased competition across the industry, and an increasing share of industry assets controlled by large institutional investors. Back in 2009, most hedge fund investors took meetings with hedge fund managers they thought had the ability to generate mid-teen returns. Today, historically low interest rates, tight credit spreads and high equity valuations have largely dampened expected returns to high single digits. As a result, many investors believe that the fees historically charged by hedge funds now represent too large a percentage of their gross performance. A recent Eurekahedge survey on North American based hedge funds noted that the average management fee has declined to 1.26% and the average performance fee has declined to 14.81%. The results of this survey raise two very important questions:

1. If these survey results accurately reflect the average fees, are these the fees paid by most hedge fund investors? 2. How can investors take advantage of changing fee structures to generate better investment results? Does the average investor pay the average fee? Twenty years ago, all investors generally paid the same fee, regardless of allocation size. Today, most funds will provide a significant fee discount to large allocators. While the definition of 'large' varies by firm, it typically starts in the range of $25-100 million. Very few hedge funds have reduced their fees for current or future investors allocating $25 million or less. While those investors have seen a slight decrease in fees, very large allocators (over $100 million) have seen fees decline as much as 25% to 50%. Allocation size has caused a large divergence in the range of fees paid by investors and is responsible for a vast majority of the decline in reve......................

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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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