With management fees falling, hedge fund managers are relying more on performance to profit, finds a Citi Prime Finance survey.
The survey respondents came from 124 hedge fund firms in North America, Europe and Asia, representing $465 billion in AuM, which is more than 18% of total industry assets. The survey found that the traditional hedge fund model of 2% management fee and 20% performance fee is changing, as fee levels have dropped to as low as 1.58% for all but the largest managers. And with rising operating costs, hedge funds barely break even collecting fees, so performance is even more important, the survey determined. In particular, emerging hedge fund managers have trouble covering expenses based on management fees, as they have less total assets. The management fees for these managers, with less than $1 billion in assets under management (AuM), averages between 1.58% and 1.63%.
“Fee compression continues to reshape the business of hedge funds, lowering fees even as expenses rise, all but eliminating fee-only operating margins, and raising the level of assets needed for a hedge fund business to succeed,” says Alan Pace, Citi’s global head of prime brokerage and client experience. “And while it’s clear that there is little room for additional downward pressure on management fees, at current average fee levels, investor-manager interests are well aligned—both parties are focused on performance.”
The survey found regional differences, with the majority of European hedge funds having at least 20% higher management company expenses than similarly sized U.S. funds. Smaller European funds, with AuM between $100 million and $500 million, also had higher marketing costs, which were 150-200% higher than similar U.S. funds mainly because of compensation differences.
Overall, the survey found that funds in Asia have lower operating costs than European and U.S. funds. For Asia-Pacific funds with $500 million AuM, average management company expenses were 42% less than the mean expenses for similar European and U.S. funds. For funds in this region with $1.5 billion AuM, fees were 39% lower than these other regions, and for funds with $100 AuM, average expenses were 20% lower.
Hedge Fund Management Fees are Down, Finds Citi Survey
With management fees falling, hedge fund managers are relying more on performance to profit, finds a Citi Prime Finance survey.
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