IG Prime reports that 64 per cent are looking to change fees to steal a march on competitors while16 per cent say they are under pressure from clients to change fees.
AI is most likely to impact predictive insights and forecasting – but just 25 per cent expect AI to significantly impact generation of alpha.
44 per cent of hedge funds are considering changing their fee structures from the traditional ‘2-and-20’ model, according to new research from IG Prime, the prime broker for hedge funds, other institutions and family offices.
Hedge funds are increasingly looking at more flexible fee structures that better reflect concerns that the hedge fund industry has gone through a long period of underperformance, the firm writes.
The ‘2-and-20’ fee structure refers to fund managers being paid 2 per cent of the fund’s assets under management each year and 20 per cent of the profits over an agreed benchmark.
74 per cent of hedge funds surveyed still use a traditional management fee structure.
64 per cent of funds who are considering changing fee structures say they believe it will give them a competitive advantage, whilst 16 per cent of funds said that pressure from clients is making them reconsider their fee structure.
Chris Beauchamp, Chief Market Analyst at IG Prime, says: “Many managers are feeling the pressure to be more flexible when it comes to their fees.
“There is a perception that the industry as a whole has delivered lacklustre returns over the last decade. That has led to asset allocators getting tougher in fee negotiations.
“While the 2-and-20 structure has served hedge funds well, many funds and their clients no longer feel it’s appropriate.”
Lower fees combined with rising cost pressures are squeezing hedge fund profits – AI is seen as a solution
As hedge funds consider more flexible fee structures, rising cost pressures are squeezing hedge fund profits. 43 per cent say compliance is the biggest cost pressure, closely followed by the need to invest more heavily in tech (42 per cent).
More managers are turning to technology such as AI to cut costs and drive efficiency. 72 per cent of managers say they expect AI to have a significant or game-changing impact on them – particularly for its ability to automate laborious and costly processes.
Predictive insights and forecasting is the area the highest number of hedge funds (54 per cent of those surveyed) believe will be significantly impacted by AI, with 50 per cent saying that AI will significantly impact algorithmic trading.
Says Chris Beauchamp: “Rising cost pressures and demand for lower fees means managers are feeling the pressure to become more cost-efficient. Hedge funds are finding that AI is emerging as one way to do that and it is expected to significantly impact a lot of the core functions of hedge funds, right through to the generation of benchmark beating returns.”
Despite optimism about the potential for AI just 25 per cent of funds surveyed said that AI would significantly impact the generation of alpha.
Between 2009 and 2024 the Eurekahedge AI Hedge Fund Index was outcompeted by the S&P500, producing a 9.8 per cent return per year versus the S&P500s 13.7 per cent. Worryingly, the AI index delivered better relative performance in the first half of the sample period, calling into question the ability of AI to self-improve.
In addition, concerns have been raised that AI could increase the risk of ‘herding behaviour’ (when a large number of investors act in a similar manner) if too many investors use the same base AI model. A further risk of using AI comes from managers putting themselves in a position where they can’t necessarily explain the investment decisions their AI makes.
