- Advertisement -
- Advertisement -

Have hedge fund fees bottomed out?

- Advertisement -

Stockholm (HedgeNordic) – It was just year ago CalPERS, the California Public Employees’ Retirement System announced it was exiting all its four billion USD of hedge fund allocations, in part because of the high cost of those investments, sparking up the fee discussion again.

The glory days of hedge funds being able to charge the famed 2%+20% and above seem long gone on a global scene. Continued pressure, especially by large investors have pushed average management fees in the second quarter of this year down to 1.53% while average performance fees have declined to 17.78%, latest data show by HFR indicates.

Hedge Fund managers, especially smaller ones and those just starting out are squeezed from two sides: pressure on their fee driven income model accompanied by increasing cost level largely driven by regulatory requirements. The biggest hurdle to overcome however for the industry though is to find the way back delivering performance – which has been, well, sluggish.

In 2014, for example, the average hedge fund globally returned 3%. The Nordic Hedge Index, NHX did better, returning 5% but still significantly fell behind equities, such as the S&P which returned 14%. Depending on benchmarks, hurdles and high water marks, many managers were therefor able to cash in on performance fees, despite investors would have been better off – in hindsight – being exposed to cheaper equity index investments while earning over four times in returns, critics claim.

Screen shot 2015-10-22 at 17.59.06

“The pressure in recent years has come in part from the low interest rate environment. The standard fee structure was developed in the late 1990s when the interest rate was much higher. Now fees seem more expensive by comparison”,  Don Steinbrugge, CEO hedge fund third party marketer, Agecroft Partners analyzed in an interview for Euromoney.

2015 so far does also not look to be the hedge fund industries big moment in time in terms of performance. By the end of August, the HFRI fund composite index was down 0.11% while, once again, Nordic hedge funds did better with a positive return of 2,6% in the same period. The big difference of course is the increased volatility on equity markets which largely for the year are also under water.

“Investors are worried about interest rates rising, spreads widening and equity markets selling off. The next six to nine months there will be more demand for strategies not correlated to capital market so very different to last three to four years where money was going into distressed debt, structured credit, event-oriented strategies and long short equity.”

Despite the fee discussion and relatively poor performance, inflows to hedge funds are continuing to increase and the industry recorded net inflows of 40 BUSD in the first two quarters of 2015 and for the first time now is scratching to break through the three trillion Dollar mark.

“This year was a reminder to investors that equity markets are not going to produce 20% annually, and that means more money will move into hedge funds. As such, pressure to reduce fees will slow for the largest funds that have demand. Indeed, if interest rates start to rise they may even be able to justify a higher fee structure. But they will be in the minority.” Kenneth J. Heinz, CFA, President of Hedge Fund Research (HFR) told Euromoney in the same interview.

Perhaps we should postpone the discussion if 2%+20% vs 1,53%+17,87% really is so much more costly, especially in relation to index ETFs until after equity markets tanked by 20%, 30% or more. Who know´s…perceptions may change. What hedge funds must do, now and then, is deliver performance, uncorrelated to (equity) markets. That is what they are supposed to do, that is what it says on the box and that is what they get paid for.

 

Picture (c) OtnaYdur—shutterstock.com

 

 

 

close

Subscribe to HedgeBrev, HedgeNordic’s weekly newsletter, and never miss the latest news!

Our newsletter is sent once a week, every Friday.

Kamran Ghalitschi
Kamran Ghalitschi
Kamran has been working in the financial industry since 1994 and has specialized on client relations and marketing. Having worked with retail clients in asset management and brokerage the first ten years of his career for major European banks, he joined a CTA / Managed Futures fund with 1,5 Billion USD under management where he was responsible for sales, client relations and operations in the BeNeLux and Nordic countries. Kamran joined a multi-family office managing their own fund of hedgefunds with 400 million USD AuM in 2009. Kamran has worked and lived in Vienna, Frankfurt, Amsterdam and Stockholm. Born in 1974, Kamran today again lives in Vienna, Austria.

Latest

Most Popular This Week

Request for Proposal

- Advertisement -

Latest Articles

Month in Review – November 2022

Stockholm (HedgeNordic) – After a difficult end to the third quarter, Nordic hedge funds are enjoying a strong fourth quarter. The Nordic hedge fund...

A COO for Protean’s Growth Journey

Stockholm (HedgeNordic) – The founding duo of the newly-launched Swedish hedge fund Protean Select has appointed Daniel Mackey as the Chief Operating Officer of...

Tor Svelland’s Fund Tops the Ranking

Stockholm (HedgeNordic) – One month to the end of the year, Svelland Global Trading Fund of Norwegian Tor A. Svelland takes the top spot...

Will Equities Bottom Out Like in 1974?

Stockholm (HedgeNordic) – Growing signs that price pressures are easing suggest inflation may have peaked, which has some market participants wondering whether equity markets...

Rising Mortgage Rates and Falling Stock Prices

Copenhagen – (Jesper Rangvid): During 2022, mortgage rates have risen and stock prices have fallen, both negatively influencing households’ consumption possibilities. But how much...

The Spectacular Unspectacular 20th Anniversary

Stockholm (HedgeNordic) – Reaching the 20th anniversary in the often short-lived and fast-paced hedge fund world is quite an achievement. In fact, some activity...