Hedge fund managers are beginning to move away from their traditional ‘2 and 20’ fee model following demands from allocators to deliver better value, according to new research.
JP Morgan’s prime services team surveyed 227 institutional investors with a combined total of $706 billion in hedge fund assets, of which only 5% paid a management fee of 2% or more last year.
The research found that for the first time in the survey’s history, more than half of all respondents are negotiating or looking to negotiate hedge fund fees.
JP Morgan found that 17% of respondents had implemented a ‘1 and 30’ model, whereby investors pays a 1% management fee that switches to a 30% performance fee once a performance target is met, therefore providing greater incentives to managers.
“The level of additional scrutiny from investors has proved healthy for the industry and will further improve alignment between managers and investors,” said Michael Monforth, global head of capital advisory, JP Morgan.
The survey showed 68% of investors feel hedge funds had underperformed in 2018. Over four-fifths of respondents were concerned that too many hedge funds are chasing limited opportunities to generate alpha.
Only 13% felt rising manage expenses, such as financing, prime brokerage and trading costs, caused hedge funds to underperform.
However, over one-third expect to increase their exposure to hedge funds, while 55% plan to keep their allocations unchanged. Eighty-five per-cent of investors also expect fee reductions in 2019.