The average management fee currently for hedge funds now stands at 1.63% with an average performance fee of 17.21%. However, seven out of 10 hedge funds still maintain a performance fee of 20%. This shows investors are still willing to reward alpha generated by top hedge fund managers.
Over two-thirds of funds have management fees of 1.5% to 2% inclusive while a vast majority (93%) fall between 1% and 2% inclusive. Very few funds differ significantly from this norm.
One single fund reported having no management fees, relying solely on a performance fee. At the other end of the spectrum, one specialised CTA fund charged a management fee of 7.5%, although this was balanced out by a very low performance fee.
The results are from a survey of hedge fund fees undertaken by Preqin. The report is based on a survey carried out in April-June 2009 with single manager fund managers and fund of hedge funds across a wide variety of strategies, global regions and encompassing funds of various sizes.
An increasing minority have lower fees of between 10% and 20% with 12% of the funds surveyed saying they charge a 10% performance fee. At the top end of the range, one CTA fund had a performance fee of 33%, while several specially-structured funds of hedge funds had no performance fee at all.
Distressed debt, event driven and special situation funds are asking for (and receiving) the highest fees, noted the report. However, market neutral, multi-strategy and fixed income arbitrage funds have on average the lowest fees.
European funds are charging on average higher fees than their US counterparts.
The report found there was some correlation between the strategy breakdowns for performance fees and management fees 3. Event driven, CTA, distressed securities and special situations funds were all high up the fee scale, while fund of hedge funds and multi-strategy funds again charge quite low fees. Most other strategies have moderate fee levels.
There was a clear correlation between the size of a fund and fees charged. Management and performance fees trend downwards as fund size increases. Performance fees showed a sharp drop as fund size increased.
This reflected the fact that many of the larger funds are fund of hedge funds which levy much lower performance fees.
The exception to this downward trend was in the highest fund size brackets where management fees rose. This is indicative of the higher demand that the largest funds can generate due to the security they offer through scale and the returns they often deliver. Many investors are willing to pay higher management fees to access these funds.
Small funds tend to invest in niche strategies that are often more volatile with the potential for higher returns. As a result they charge higher fees to reflect this expected higher performance.
The report found significant differences between managers based in different regions. This could have been caused by greater competition or the greater maturity of its hedge fund market. For example, North American managers had markedly lower fees for investors than their European counterparts.
Emerging hedge fund markets in Asia have lower fees than both, probably in order to attract sceptical investors to the region.
The report concluded that the ‘2 and 20′ fee structure as an industry standard is now outdated. Fees are being driven down as investors become more powerful in the manager/client relationship, concluded the report.
US pension funds such as CalPERS and Utah Retirement System have been vocal in their belief that the hedge fund remittance structure needs to evolve and managers in response to these demands and those of other institutional investors are changing their fee structures, said the report.
“Those funds which are flexible in the terms they can offer their investors are the ones which are picking up the new investment now assets are flowing back into hedge funds,” concluded Amy Bensted, manager of hedge fund products at Preqin.
Preqin is a source of information for the alternative assets industry, providing data and analysis via online databases, publications and bespoke data requests.