As investor redemptions accelerate, hedge fund firms are scrambling to hold on to their place in institutional portfolios, a new survey shows.
In a poll of 276 hedge fund managers conducted by Preqin, three quarters cited a willingness to reduce fees in order to attract and retain capital. Many also said they planned to spend more on marketing and investor relations “in a bid to overcome investor skepticism about the value of investing in hedge funds,” the alternative investment data firm said.
Investors withdrew a net $110 billion from hedge funds in 2016, according to Preqin, with many large institutional investors complaining of the industry’s low performance and high fees. More than a third of hedge fund managers surveyed said it was harder to retain assets in 2016 compared with 2015, despite improved performance year-over-year.
“Investor dissatisfaction shows no signs of abating in the early part of 2017, and it is clear that addressing investor pressure around performance and fees will be the key challenge for hedge fund managers in the year ahead,” said Amy Bensted, Preqin’s head of hedge fund products, in a statement accompanying the survey. “Managers will be looking to build on the three-year high returns of 7.3 percent seen in 2016 to restore confidence in the asset class as a whole, revive investor sentiment, and begin reversing the trend of outflows from hedge funds.”
Only 17 percent of active single-manager hedge funds still deploy the traditional 2-and-20 fee structure (in which managers charge a 2 percent management fee and 20 percent of performance gains), according to Preqin data. Management fees in particular have come down over the past few years, with the average dropping to 1.51 percent for funds launched in 2016. But although the majority of investors (55 percent) said management fees improved last year, 76 percent were not yet satisfied with management fee terms.
Average performance fees also remain high across the industry at 19.3 percent, but managers are increasingly offering fee provisions to better align their interests with those of investors. Nearly 90 percent of survey respondents said they implement a high-water mark on at least one of their funds — meaning previous losses must be regained before the manager is eligible to charge performance fees again. Hurdle rates, meanwhile, are used by 42 percent of managers surveyed, with 9 percent open to using them in the future.
Managers are more likely to offer fee concessions for larger investors, with 60 percent offering discounts to secure a large mandate. Early-stage and seed investors are also likely to win concessions on fees.
“Investors have... indicated that they want to see further reductions of hedge fund fees, and it seems as those managers are increasingly looking to provide them,” Bensted said in the statement. “Firms that can generate healthy returns for their investors and meet concerns over fees could truly set themselves apart from their peers in 2017.”
