Download Hedge Fund Fee Structure Study

Hedge Fund
Fee Structure Study
eVestment Alternatives Research
August 2013
Hedge Fund Fee Structure Study
Figures 1-2: Average management and incentive fee by strategy and fund inception date
Overview
The eVestment alternatives database contains information on hedge fund and
fund of hedge funds (FoHF) returns, assets under management, and a wide
range of qualitative characteristics. Our commercial dataset, which includes both
currently active and liquidated funds, covers over 23,000 products. The following
study investigates historical trends in fee structures based on product inception.
1.9%
1.7%
1.5%
We utilize three time frames separated by periods of high industry churn: pre-
1.3%
2002, 2002 to 2007, and post-2007.
Average hedge fund management fees have increased from 1.38% pre-2002 to
1.55% in the pre-financial crisis lull and finally to 1.58% post-2007. Fund of
hedge funds management fees have decreased over the years, averaging 1.32%
pre-2002 to 1.28% from 2002-2007 to 1.26% post-2007. Although the current
1.1%
0.9%
trend seems likely to continue for some time, this should shift given rising
management fees for underlying funds must be funded to some degree by stable
revenue from funds of hedge funds’ end investors.
Aggregate changes in incentive fees have shown an inverse relationship to
Pre-2002
changes in management fees. Average incentive fees were 19.82% for hedge
2002 - 2007
Post-2007
funds which launched before 2002. Incentive fees from the 2002 – 2007 period
decreased to an average of 19.58% and fell again to 19.25% after 2007. Price
21%
13.0%
20%
12.5%
19%
12.0%
18%
11.5%
17%
11.0%
competition among hedge funds seems to have manifested on the incentive fee
side while demand for institutional infrastructure has subtly raised management
fees since the financial crisis. Funds of hedge funds raised incentive fees from
11.13% prior to 2002, to 11.47% from 2002-2007, and to 12.73% after 2007.
Average fee structure data for fund of hedge fund products may be misleading in
some respects; formal studies and anecdotal evidence suggest an increase in
willingness from FoHF firms to cater to their clients via bespoke solutions and
negotiable fee structures. We posit the emergence of a two tiered client base for
FoHF firms with the bifurcation caused by larger allocators’ supplier power and
FoHF firms’ attempts to maintain margins. Institutional investors continue to
command flexibility in the structure of their allocations and are generally not
constrained to the average fees of commingled FoHF products. Price-taking
smaller investors have benefited from increased competition among FoHF
houses on the management fee side, but contribute indirectly, via higher
incentive fees, to the marginal dollar offset for the increased infrastructure costs
Pre-2002
of FoHF firms’ bespoke services.
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2002 - 2007
Post-2007
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Hedge Fund Fee Structure Study
Figures 3: Percentage of currently active funds with specific fee structures
Strategy-Specific Analysis
2 & 20
1.5 & 20
Other
32.8%
35.0%
25.5%
39.6%
36.0%
47.2%
26.2%
52.4%
37.9%
28.7%
44.4%
23.9%
45.0%
24.1%
35.4%
26.0%
17.6%
34.1%
4.5%
23.6%
19.1%
28.6%
43.4%
20.0%
50.4%
25.0%
38.0%
35.2%
39.7%
43.2%
38.6%
52.2%
27.0%
1.5 & 10
1 & 10
Other
9.0%
20.9%
70.1%
On a strategy basis, changes in fee structures have varied as seen in figure 2. All
Hedge Funds
Convertible Arbitrage
Credit Strategies
Distressed
Event Driven/Special Situations
Global Macro
Long Short Equity
Managed Futures
Multi-Strategy
Non-Directional Equity
Securitized Credit
hedge fund strategies, with the exception of managed futures, experienced
different degrees of increasing management fees moving from the pre-2002
period to the 2002-2007 period. Movement in incentive fees were mixed across
both strategies and periods.
Credit strategies saw a sharp drop in the most recent period in both average
management and average incentive fees. Distressed and securitized credit funds
experienced rises in average management and incentive fees in the post-2007
time frame; we note that the number of new distressed funds was relatively low
during this period. Growing investor interest, a more acute willingness to allocate
to niche and/or illiquid strategies, and market conditions post-financial crisis may
Funds of Hedge Funds
have benefited these strategies and their ability to set fees higher. Equity
strategies including event driven/special situations, long short equity, and nondirectional equity did not experience much change in incentive fees. Macro and
managed futures funds launched post-2007 with smaller fees, an unexpected
Figures 4: Distribution of management fees for currently active funds
result given their outperformance during 2008 and 2009.
For the hedge fund industry as a whole, 2-and-20 continues to be the most
100%
0.6%
2.1%
popular fee structure arrangement accounting for close to a third of all funds;
1.5-and-20 is a close second representing 23.9% of all currently active hedge
24.1%
80%
39.2%
60%
34.0%
39.9%
31.0%
40%
22.8%
The fees charged by alternative investments will continue to be an oft debated
topic amongst investors, hedge fund firms, and the media. We find fee
20%
impetus for further evolution including, inter alia, the “retail-ization” of
alternative strategy territory and hedge fund platforms/wrappers) and increasing
geographic diversity.
0%
18.5%
7.9%
Hedge Funds
< 1.0%
Credit Strategies
≥ 1.0% & < 1.4%
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37.3%
23.4%
24.4%
structures have been receptive to change on the whole and see no lack of
alternative strategies (from both the encroachment of mutual funds into
2.6%
49.7%
have an incentive fee of 20%. We highlight management fee distributions for
Conclusion
0.9%
27.3%
34.6%
funds. Variation is more common in management fees as 80.7% of hedge funds
select strategies in figure 4.
3.5%
21.1%
28.7%
15.7%
2.3%
3.2%
5.2%
Global Macro
Long Short Equity
Multi-Strategy
≥ 1.4% & < 1.8%
≥ 1.8% & < 2.2%
≥ 2.2%
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