Hedge funds are ditching the traditional "two and twenty" fee structure that has hurt the sector's public image and invited criticisms of poor value for money, a global survey of hedge fund managers showed on Wednesday. The 'two' refers to the 2% annual management fee charged by fund firms on the assets managed, while the 'twenty' refers to the 20% of profits made by the fund above a certain predefined benchmark.
The fee arrangement has become increasingly unpopular among some hedge fund clients, who believed they were paying too much upside to managers when bets performed well. The survey conducted by trade group The Alternative Investment Management Association found that the average fee for the sector was now 1.3% of assets under management (AUM) and 1.4% for funds launched in the past year.
Separately, more than 75% of survey respondents saw a mutual desire for a long-term investment commitment or an exchange of knowledge with investors as essential for their businesses.
More than three-quarters of respondents said demonstrating 'skin in the game' was also important and could be achieved with the investment of personal capital. Almost 40% of the managers said they used hurdle rates to set a minimum return for their customers before a performance fee was charged. Around 80% of managers also pledged to cut management fees in return for a greater share of performance, the survey showed.
"A collaborative partnership, based on clear communication, has enabled the customised, solutions-based approach that investors want from the modern hedge fund manager," said AIMA Chief Executive Officer Jack Inglis. The survey was based on responses from 118 hedge fund managers, globally representing approximately $440 billion in AUM. Hedge funds continued their positive performance in 2019 with the Eurekahedge European Hedge Fund Index gaining 0.77% in June.
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