Stockholm (HedgeNordic) – Of the hedge funds tracked by Preqin, only 35% currently charge both a 2% management fee and a 20% performance fee, with average fees falling across recent years, according to its latest study. The findings suggest impaired performances and high-profile redemptions resulting in increased investor concern have influenced numerous hedge fund managers to bring down management and performance fees below the 2/20 industry standard.
“The hedge fund industry has now seen an extended period of lower performance, and four out five investors recently stated that their hedge fund investments had not met their expectations in this area,” says Amy Bensted, head of hedge fund products at Preqin. “In these circumstances, it is not surprising that increasing scrutiny has been paid to the fees that hedge funds charge – especially in the wake of some high-profile investors citing fees as a factor in them reducing or liquidating their hedge fund portfolios,” Ms Bensted suggests, explaining more than half of investors surveyed by Preqin mentioned management and performance equally as areas in urgent need of improvement, with a high proportion intuiting that their interests are not sufficiently aligned with those of managers.
The mean management fee in 2016 is 1.57%, with the mean performance fee being 19.29%. Fees are lower still among recently launched funds, with those launched in 2016 demanding a 1.53% management fee and a 19.13% performance fee on average.
This is likely partly due to a response from managers to persistent and increasing concerns among investors in relation to fund fees. 49% of hedge fund investors in the most recent Preqin survey cited fees as a key issue facing the industry over the next year, while 58% responded they did not believe their interests to be aligned with those of managers.
There is evidence, therefore, “that the industry has seen a general shift away from the ‘2 and 20’ fee structure, despite it still being considered the industry standard by many,” adds Ms Bensted. “The hedge fund market is increasingly crowded, and many smaller or newer managers are seeking to make their lower fees a way to differentiate themselves from their competitors. It is true that the largest, oldest, and best performing hedge funds are still able to command higher fees, but if investors are prepared to commit to a lesser-known fund, they may opportunities that offer them a significantly lower rate.”
Indeed, issues surrounding fees have undergone significant change in the last 12 months. Preqin’s survey reported that 58% of investors had seen fund terms and conditions shifting in their favour, compared to just 8% deeming they had shifted in the favour of managers.
In addition, 63% and 32% of investors cited management and performance fees respectively as areas of improvement in the past year, although 73% and 60% respectively also cited these areas as being in need of still further improvement.
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