The fees that hedge funds are able to charge their investors are falling sharply as investors rebel over disappointing returns, heard delegates at AsianInvestor’s Asian Investment Summit last week.
The long-held hedge fund industry standard of a 2% management fee and a 20% performance fee has crumpled and investors, in general, are now paying less or, in some cases, either paying one or the other.
“Hedge funds over the past two to three years didn’t contribute to our performance that much,” said Jang Dong-Hun, chief investment officer of Korea’s Public Officials Benefit Association (Poba), speaking on a panel at the event.
Poba has $9 billion in assets under management, 47% of which is in alternative investments. The firm has put 25% of this into real estate, 10% in private equity, 4% in hedge funds, another 3% in infrastructure and smaller percentages in other niche areas.
“We have requested our external advisers to reduce their fee structure. It is a struggle for us and a challenge for hedge fund managers,” Jang said. Poba invests in hedge funds via funds of funds.
About 41% of investors succeeded in reducing their hedge fund management fees in 2016 without longer lock-ups, up from 25% in 2014, according to a survey by Albourne Partners, a research and consultancy group.
“The market is in the process of rewriting the contract between investors and managers,” said Richard Johnston, managing director for Asia at Albourne, also speaking at the summit. “It is open season on fees.”
Many investors now believe that management fees should be sufficient to cover no more than the cost of running the day-to-day business of the hedge fund. Large pension schemes, such as the Teacher Retirement System of Texas, are publicly speaking out against what they see as exhorbitant fees being charged by hedge fund managers.
Disappointing returns prompted this rebellion. Albourne found that the aggregate net income investors received from their hedge fund investments fell to $23 billion in 2015 from $134 billion in 2013, based on an analysis of the accounts of 600 funds on Albourne’s platform, which together manage a $1 trillion worth of assets.
“Investors are waking up to reality and are being much more aggressive on fees. This trend really got going in 2016 and believe me it just gained a lot more momentum in 2017,” Johnston said.
Hedge funds have become the whipping boys of the alternatives industry of late due to their lacklustre performance. The Lyxor Hedge Fund index is up just 0.52% this year, as of April 28.
As investors have pulled money out, so the AUM of hedge funds in Asia have shrunk to $110.41 billion as of April from $126.31 billion in the second quarter of 2015, according to Hedge Fund Research Inc (HFRI).
Hedge funds in Asia have also been relative laggards compared with their global peers. HFRI’s emerging markets index was up 6.93% in 2016, but the Asia ex-Japan index was down 0.06%.
So not only is the decline in hedge fund fees probably accelerating, thinks Johnston, it is also a well established downward trend, contrary to what some people in the industry might think.
Albourne estimates that the average management fee had by 2015 already fallen to 1.38%, while the performance fee was about 16%. “The 2 and 20 model has probably been dead for some time now,” Johnston said.
Indeed, Robert Mullane, London-based managing director in the alternative investments and manager selection group at Goldman Sachs Asset Management, told AsianInvestor in February that to convince investors to allocate more capital to hedge funds, fee discussions were becoming increasingly important.
Mullane said the firm was aggressively discussing with fund managers what the appropriate level for fees should be and noted growing interest among clients for a single-layer fee structure.
Moreover, A survey published in March by Deutsche Bank, covering 460 global hedge fund allocators with $1.9 trillion in assets as of end-2016, showed that just over half of all respondents thought a manager’s willingness to negotiate on fund terms was a key factor — alongside performance — behind their decision to invest.