Asia-based hedge funds are charging the industry’s lowest management and performance fees in a bid to attract institutional investors, according to US research firm Preqin.
The once-standard fee structure of 2% for management and 20% for performance is now being charged by only 29% of single-manager hedge funds globally, with fees having taken a downward trend since 2008.
Asian hedge funds, on average, levy 1.56% for management and 18.79% for performance, below the respective global averages of 1.6% and 19.2%. Preqin notes that Asia is still emerging as a new hub for hedge fund investment, leading managers to be flexible on fees to “remain appealing to the institutional market”.
Some funds in the region are known to charge lower fees in return for longer investment lock-up periods, ranging from one to three years, or for larger capital allocations. One Hong Kong-based prime broking executive notes that mid-size hedge funds – which in Asia range between about $250 million to $750 million in AUM – tend to be the most flexible in fee negotiations.
Industry executives who deal with funds globally say that while they have seen levies drop across all regions, Asia has not noticeably emerged as a bargain basement for fees.
However, one noted that the smaller average size of funds in Asia provided investors with more bargaining power when negotiating fees in exchange for larger investment sizes and, in some cases, hedge funds have granted far lower levies than Preqin's averages for the region.
The lower fees are in line with global trends, with several established global firms – including DE Shaw – also offering reduced fees for certain funds, according to Preqin.
On a global basis, commodities trading advisor funds charge the highest performance fees by strategy, at an average of 20.56%, while macro and statistical arbitrage funds had the highest average management fees, at 1.84% for both.
Funds of hedge funds had the lowest average management and performance fees at a respective 1.35% and 10.58%. Many fund of funds had low returns and mass redemptions post-crisis, leading them to reduce fees to appeal to sceptical institutions, notes Preqin.
Given the fee falls over the past two years, the hedge fund sector appears to be moving towards a fee standard of 1.5% for management and 20% for performance, Preqin predicts. However, if industry returns continue to flag, there may be pressure from institutional investors to reduce performance fees.