Hedge fund fees continue to fall

Date: Friday, April 16, 2010
Author: Hedge Funds review

Hedge fund fees slipped further away from the 2 and 20 industry standard last year, with less than 40% continuing to charge 2% management and 20% performance fees.

The average management fee charged by single-manager funds at the end of 2009 was 1.65% with an average performance fee of 18.89%, according to a report by information provider Preqin.

For funds of hedge funds (FoHFs) the average management fee is 1.44% and the average performance fee is 11.54%.

A total of 38% of single manager funds stuck with the 2 and 20 structure that is still seen as traditional for hedge funds.

Between the second and fourth quarters of 2009 the proportion of single managers charging 2% management fees dropped from 54% to 40%. The proportion charging between 1.5%-1.99% rose from 22% to 33%.

The average fee did rise slightly between June and December 2009. In July last year Preqin said the average management fee for a single manager fund was 1.63% with an average performance fee of 17.21%.

Managers in different regions reacted to changing investor demands and the financial crisis in different ways. North American managers charge the most, with a mean management fee of 1.72% and a mean performance fee of 19.12%. That contrasts with 1.59% and 18.23% in Europe and 1.51% and 19.32% in Asia.

Preqin found a strong correlation between performance fees and the returns of both single manager funds and FoHFs. Funds charging a higher performance fee tended to make better returns for investors.

Preqin noted: "Although investors in funds charging a performance fee of 0-9.9% will save money on manager performance incentives, they will in turn have to compromise on the returns their hedge funds are generating for them."

The study also found lock-up periods tended to be longer in funds charging lower fees.

A number of funds have launched in the past six months with management fees of less than 2%, confirming Preqin's findings.