The rollercoaster ride the hedge fund business has been on in recent years has driven many hedge fund managers to negotiate lower management fees with investors, but far fewer are willing to budge on performance fees, according to a new State of Institutional Fees Report: Hedge Funds, released today.
Of the hedge funds covered in the report, 38.8% of them negotiated their management fees vs. only 11.3% of managers who were willing to negotiate their performance fees. The size of the investment made in a hedge fund also impacted the amount and type of fee discounts hedge fund managers were willing to negotiate, according to the report.
The report provides an overview of stated and negotiated fees from a sample of 180 recent hedge fund commitments made by 50 U.S. public pension plans tracked by eVestment Market Lens. The report offers investors and fund managers a look at how fee negotiations tend to go so all parties can reach mutually beneficial outcomes without investors paying too much or fund managers leaving money on the table.
Some key points from the report include:
- The most common management fees were 1% (for managed futures and funds of hedge funds), 1.5% (equity and multi-strategy funds) and 2% (fixed income funds). Event driven/distressed and macro funds charged 1.5% and 2% with the same frequency. The most common agreed upon performance fee among all direct hedge funds was the oft referenced 20%; for funds of hedge funds it was 10%.
- Managed futures funds offered the lowest negotiated fees for public plans among direct hedge fund strategies, charging an average 0.7% in management and 16.4% in performance fees. Negotiated fees for managed futures strategies ranged from a 0-and-10 structure (a levered systematic index-tracker) to a 2-and-20 setup (algorithmic frontier markets-focused fund).
- The average commitment amount with discounted fees was over 2x larger than that of commitments without any change from their stated fees. One hundred and nineteen million dollars was the average commitment size with a management fee discount and $133 million was the average commitment size with a performance fee reduction; $52 million was the average commitment size showing no change in management fees and $55 million showing no change for performance fees.
To download a full copy of the report, please click here.