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Investors push hedge fund launches higher, but fees are dropping

Date: Friday, June 14, 2013
Author: Matthew L. Brown, Boston Business Journal

Confident investors pushed the number of hedge fund launches to its highest point in a year during the first quarter, and continued to push down the fees they pay fund managers.

According to Chicago-based Hedge Fund Research Inc., 297 funds were launched in the first quarter, the third-highest quarterly total since the beginning of 2008, trailing only the first quarters of 2012 and 2011.

Locally, industry executives say upticks in fund launches have come in spurts, and conservatism is the name of the game. The funds that have launched are small, and they’ve taken longer to get themselves ready for prime time.

“No one is doing anything overly funky,” said Michael Silvia, director at accounting firm Marcum LLP’s Boston office.

Investors considering new funds are looking very closely at the track records of the managers launching those funds.

“It’s a challenge to explain to investors what they were doing and how well they did it,” Silvia said.

As a result, investors aren’t willing to commit “a big chunk of change” up front.

They’re also unwilling to pay fees the way they used to.

Managers historically charged “two and 20,” that is, a 2 percent fee on the assets they managed and a 20 percent cut of the profits.

But average first quarter management fees fell 0.32 percentage points compared to the same period a year ago, to 1.55 percent. Incentive fees were 17.4 percent in the first quarter, a 0.31-percentage-point drop from a year ago, according to Hedge Fund Research.

“The days of ‘two and 20” are behind us,” said David Simoes, co-leader of Deloitte’s New England hedge fund practice. “Investors are feeling fees are too high."

Hedge fund liquidations declined to 196 in the quarter, down from 232 a year prior and 238 in the fourth quarter.

Industry assets finished the period at a record $2.4 trillion, and as $15.2 billion flowed into hedge funds during the quarter.