Since the Global Financial Crisis, hedge fund fee structures have been changing dramatically. Performance hasn’t been what it was leading up to the financial crisis, so many managers have been forced to slash their fees in order to attract capital. However, hedge fund fees aren’t the primary concern of investors because managers who continue to outperform their peers aren’t having much trouble attracting capital.
Traditional hedge fund fee structure called into question
Eurekahedge notes that the traditional 2 and 20 hedge fund fee structure was called into question by the mediocre returns many funds have posted since the financial crisis. Before 2008, most hedge funds managed double-digit annual returns, but since then, management and performance fees have been declining. The publication also said increasing competition and tighter regulations over alternative investment vehicles also contributed to the declining hedge fund fees. Despite the overall trend of declining fees, some managers have been able to retain leverage over fees by delivering strong returns.
Talk of inflation has been swirling for some time amid all the stimulus that's been pouring into the market and the soaring debt levels in the U.S. The Federal Reserve has said that any inflation that does occur will be temporary, but one hedge fund macro trader says there are plenty of reasons not to Read More
Hedge fund fee structures continue to include both management and performance fees. Performance fees may now include extra conditions like a hurdle rate, which is the minimum gain the fund manager must return before a performance fee will be charged. Another common condition is a high water mark, which Eurekahedge defines as "the peak value of a fund's net asset value (NAV) over a period of time. In this case, performance fees are charged on gains which exceed the high water mark.
Management fees are charged regardless of the hedge fund's performance, but conditions are usually also applied as part of the hedge fund fee structure. For example, the fee may vary based on the complexity of the fund's strategy, the liquidity of the asset classes included in the fund, the lockup period and amount of money invested by each investor. Higher fees are sometimes charged for benefits like a shorter lockup period, while management fees may decrease as the size of the investment increases.
Eurekahedge published these charts of average hedge fund fee structures since the years before the financial crisis:
Growth at opposite ends of the spectrum
The publication noted that since the 2008 financial crisis, there has been a dramatic increase in assets under management by hedge fund managers charging management fees of less than 1%. This reflects increasing demand for hedge fund fee structures with lower fees. As of June, 28.3% of assets in the industry, or about $648.8 billion, were in funds which charge a 2% or higher management fee. Fund managers charging less than 1% in management fees were handling 28.6% or $656.5 billion of assets in the hedge fund industry.
Even though the number of funds charging less than a 1% management fee has risen dramatically, the proportion of assets managed by funds with management fees of at least 2% has remained strong, refusing to bend to the pressure of the last 15 years.
As of the end of 2008, 35.2% of the assets under management in the hedge fund industry were in funds with management fees of 2% or higher. The percentage fell to 28.3% by June. Meanwhile funds charging a less-than 1.5% management fee has boosted their share from 30.2% of the assets to 55.1% of the assets.
Interestingly, hedge fund fee structure trends are slightly different when it comes to performance fees. Even though managers have been pressured to cut their fees since the global financial crisis, more than half of the industry's assets are still held by funds with at least a 20% performance fee. The last two years in particular have brought an increase in market share for funds with a 20% or higher performance fee.
This article first appeared on ValueWalk Premium