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Preqin Amy Bensted

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Investors increase pressure on hedge funds to lower fees

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Lower recent performance, high-profile redemptions and increased concern from investors on the issue of fees have influenced many hedge fund managers to bring their management and performance charges below the “2 and 20” industry standard.

That’s according to the latest research from Preqin which reveals that just 35 per cent of hedge funds tracked by the company currently charge both a 2 per cent management fee and a 20 per cent performance fee, and average fees have fallen over recent years.
 
In 2016, the mean management fee is 1.57 per cent, while the mean performance fee is 19.29 per cent.
 
Among the most recent funds these fees are lower still: funds launched in 2016 have, on average, a 1.53 per cent management fee and a 19.13 per cent performance fee.
 
In part, this could be seen as a response from managers to increased and persistent concerns among investors in relation to fund fees. In Preqin’s most recent survey of hedge fund investors, almost half (49 per cent) cited fees as a key issue facing the industry over the next 12 months, the joint highest proportion. At the same time, 58 per cent said that they did not believe their interests were aligned with those of managers.
 
However, the issue around fees has seen some change over the past 12 months: 58 per cent of investors said they had seen fund terms and conditions shift in their favour, compared to just 8 per cent that thought they had changed in favour of managers. Additionally, 63 per cent and 32 per cent of investors cited management and performance fees respectively as an area of improvement over the past 12 months, although 73 per cent and 60 per cent respectively also cited these areas as in need of further improvement.

“The hedge fund industry has now seen an extended period of lower performance, and four out of five investors recently stated that their hedge fund investments had not met their expectations in this area,” says Amy Bensted (pictured), head of hedge fund products at Preqin. “In these circumstances, it is not surprising that increasing scrutiny has been paid to the fees that hedge funds charge – especially in the wake of some high-profile investors citing fees as a factor in them reducing or liquidating their hedge fund portfolios. More than half of investors surveyed by Preqin have mentioned both management and performance fees as areas in need of improvement, and a high proportion currently feel that their interests are not aligned with those of managers.

“However, there is evidence that the industry has seen a general shift away from the ‘2 and 20’ fee structure, despite it still being considered the industry standard by many. The hedge fund market is increasingly crowded, and many smaller or newer managers are seeking to make their lower fees a way to differentiate themselves from their competitors. It is true that the largest, oldest, and best performing hedge funds are still able to command higher fees, but if investors are prepared to commit to a lesser-known fund, they may find many opportunities that offer them a significantly lower fee rate.”

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