Hedge fund performance fee – Andrew Law’s macro hedge fund Caxton Associates is the latest high-profile hedge fund to cut its asset management fees as investor backlash grows against high fees and poor performance in hedge fund sector.
Under the new regime, the firm will charge 2.2% to 2.5% annually on assets, down from 2.6% previously according to Bloomberg which cites a letter to investors. However, the firm will continue to take a 27.5% cut of profits.
Even after these reductions, Caxton’s fees are still above the industry average. The hedge fund world is well known for its ‘2 and 20’ fee structure, but Caxton demands a lot more from its investors.
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In addition to the lower management charges, the firm has introduced a new share class, which requires clients to keep their money in the firm for three years and charges a 2% management fee. According to Bloomberg Caxton was down 2.6% for the year to September 2.
Law’s decision to cut fees for investors is a reflection of the tough operating environment hedge funds now find themselves in.
hedge fund performance fee – Hedge fund performance leads to outflows
Bloomberg’s figures show assets at Brevan Howard Asset Management, run by billionaire Alan Howard, have dropped to $18 billion from $23.7 billion in December, a drop of around 24%. Leon Cooperman’s assets at Omega Advisors have fallen about 16% or $1.1 billion since December of last year. Assets managed by Perry Capital have declined to $4 billion from $6.6 billion in December. John Paulson’s assets under management are down by an additional 15% this year. Tudor Investment Corp now has $11 billion in assets under management versus $13 billion at the beginning of the year; that’s despite well-known manager Paul Tudor Jones slashing his annual management charge on one of his funds from 2.75% to 2.25% and cutting performance fees from 27% to 25%.
Och-Ziff Capital Management Group, one of the world’s largest hedge funds, has seen its assets under management declined 12% to $39.2 billion from $44.6 billion over the past nine months.
Investors have been pulling money from the sector citing poor performance and high fees, which has pushed managers to try and entice investors by lowering fees. According to Hedge Fund Research, the average performance fee of hedge funds fell to 17.6% in the first quarter of this year, down from 19.3% in the first quarter of 2008. Management fees have stayed more steady.
These the cuts may already be enticing clients back to the industry. According to Bloomberg, the California State Teachers’ Retirement System plans to add to its holdings of hedge funds as it seeks to smooth volatile returns, a move that may send as much as $8.7 billion to hedge funds over the next three years.
The trend is not only a US phenomenon – Eurkeahedge notes in its September report that fees are under pressure in Asia. Specifically, the report states noting the latest figures are an outlier:
As of 2016 year-to-date, the average performance fees for funds launched during the year is at a high of 19.31%. In 2016, a number of prominent management companies have launched hedge funds with an Asian angle. Coming from well-known fund management companies, these new hedge funds tend to have higher performance fees at their inception date thus bringing the average performance fees as seen for 2016 year-to-date a notch higher. Having said that, we are dealing with a smaller sample size as launch activity has hit an all-time low in 2016 thus higher performance fees are more an anomaly and less of an emerging trend given the pressures on the industry. Overall, the traditional 2 and 20 hedge fund fee structure has been challenged in the recent years by a fresh start up scene in Asia. These start up hedge funds are often willing to negotiate lower fees in order to attract seed capital, thus putting pressure on existing management companies to be more flexible on their fee structure as well.
See chart below on hedge fund performance fee
Preqin is out with more data today confirming the trend of lower fees and/or pressure to lower.
Below is an excerpt on the topic.
The Decline of “2 and 20”
Increased investor scrutiny and the possibility of investor withdrawals have encouraged some prominent fund managers to lower their fees in recent months. Examples of fund managers tracked by Hedge Fund Online that have recently lowered their fees include Tudor Investment Corporation – which reduced the fees for one of the share classes for Tudor BVI Global Portfolio LP to a 2.25% management fee and a 25% performance fee, from 2.75% and 27% previously – and Och-Ziff Capital Management, which announced in August that it was reducing the management fees for three of its funds by 25 basis points.
The pressure to offer lower fees, however, goes beyond these individual fund managers and has been felt across the industry. Although “2 and 20”, a 2% management fee and a 20% performance fee, is still sometimes referred to as the standard hedge fund fee structure, at present only 35% of single-manager hedge funds tracked by Preqin charge this standard; average fees are currently a 1.57% management fee and a 19.29% performance fee (Fig. 4). The “20” part of the fee structure is more common than the “2”: only 37% of active funds have an 2% management fee, while 82% have a 20% performance fee.