Hedge funds increase co-investment and customise offerings with investors: industry moves beyond ‘2 and 20’ fee structure

Results from a survey undertaken by AIMA and RSM show the classic ‘2 and 20’ fee model is no longer the standard structure charged by the hedge fund industry. As fund managers (‘managers’) and investors focus on customisation and deeper partnerships to align interests, attention is no longer solely on fees.

The survey shows a new average management fee of 1.3% of assets under management (AUM) and 1.4% for new funds launched in the past 12 months. Discussions with managers and investors during the research reveal a shared belief that managers’ share of alpha should be about one third.

Findings demonstrate that a maturing industry and institutional investor base now require hedge funds to deliver customised solutions, closer collaboration and closer communication.

Over half of surveyed managers now use customised investment solutions, and the survey suggests that managers who can respond to individual investor needs are best positioned to grow.

The importance of customisation is a significant development from the findings of AIMA’s 2016 ‘In Concert’ survey, which suggested fees and fund structures were then the focus of efforts to align interests.

Other key findings:

• Over 75% of managers see a mutual desire for a long-term investment commitment or an exchange of knowledge with investors as essential.
• The importance of ‘skin in the game’ to demonstrate partnership was confirmed by 76% of surveyed managers, who revealed they have significant personal capital invested in their funds.
• Nearly all respondents have a performance fee high-water mark with their investors and almost 40% use hurdle rates to set a minimum return for client(s) before a performance fee can be charged.
• Nearly 80% of managers would reduce management fees in return for a greater share of performance.
   

Jack Inglis, AIMA CEO, commented: “Hedge fund managers are being responsive to investor requirements. The results of our survey reflect an ability to partner with investors to deliver the investment solutions they need on mutually agreed terms.

“No longer are the interests of investors and managers aligned solely through fee arrangements. A collaborative partnership, based on clear communication, has enabled the customised, solutions-based approach that investors want from the modern hedge fund manager.”

AIMA’s Global Investor Steering Group said: “Investors want alternative asset managers that can respond to their individual requirements, but requirements can vary. In recent years hedge fund managers have demonstrated more flexibility and willingness to collaborate with investors to customise their products and share their expertise. This is as important as the ability to offer competitive fees and a differentiated product. This research is an important demonstration of how hedge fund managers are responding to investor requirements and how their offering remains an essential part of a diversified portfolio.”

Jonathan Waterman, National Asset Management leader, RSM US stated: “Given we are ten years into a bull market, we’re not surprised by the results of the survey. Hedge funds have a unique flexibility and have long been known as force of innovation across the industry, especially in down markets when we see their true benefit rise to the top.

“Their reputation is evolving, primarily due to the relationships built with investors. As this paper and the conversations taking place between managers and investors globally reveal, this is producing long-term partnerships which can tackle all investment environments.”

- ENDS -

Notes to editors

Survey Methodology

1. Hedge fund manager survey with input from 118 hedge fund managers (referenced as respondents throughout the paper) globally representing approximately $440bn in assets under management (AUM). For simplicity, the use of hedge funds and hedge fund managers are used interchangeably throughout.

2. In-depth round table discussion and one-to-one interviews with hedge funds to improve understanding of the key findings from the manager survey.

3. Charts included in the paper represent the number of responses from either the entire population that completed the survey or the number of responses to a question.

4. Input from a global investor steering committee which manages more than $1trillion in AUM and allocates approximately $100bn in AUM to hedge funds.

5. Input from relevant thought leadership and external research across various hedge fund industry stakeholders. These include investors, hedge fund managers, hedge fund industry service providers and policymakers.

6. Throughout the report readers will see several testimonials from hedge fund managers who participated in roundtable discussions.

About AIMA

The Alternative Investment Management Association (AIMA) works to grow the alternative investment industry to benefit the world’s economy, savers and investors. To achieve this, we strengthen the links between fund managers, investors, regulators and industry service providers.

Our thirty-year heritage means AIMA understands our members’ priorities, who access our resources to grow their businesses, create lasting connections using our events and benefit from the effect our advocacy work has on the environment in which they must operate. Since our formation the industry has grown by 60 times.

AIMA’s capacity to deliver local support across the globe has made us connected, knowledgeable and influential, and means our 2,000 members are now based in over 60 countries.

About RSM

RSM is a powerful network of audit, tax and consulting experts with offices all over the world. As an integrated team, we share skills, insight and resources, as well as a client-centric approach that’s based on a deep understanding of your business. This is how we empower you to move forward with confidence and realise your full potential. This is The Power of Being Understood.

Giving you confidence

Our firms are here to advise you on a wide range of issues from audit and assurance, consulting, tax, risk advisory, IFRS, restructuring, transaction and business and financial advisory solutions. As well as these core services, our member firms also offer a wide range of specialist services, such as wealth management, IT consulting, legal advisory, forensic accounting and human resource consulting.

We put ourselves at the heart of your business where we can be most effective. As your long-term adviser, we gain a deep understanding of every aspect of your business so we can respond with the right expertise and insights at the right time. Wherever you are in the world, you will enjoy the same seamless service, combining astute local knowledge with the global expertise of our most senior professionals. We’re passionate about your success and about empowering you so you can face the future with confidence.

Fast facts:

• We have firms in 116 countries and are in each of the top 40 major business centres throughout the world.
• We have combined staff of over 41,000
• We have 750 offices across the Americas, Asia Pacific, Europe, Middle East and Africa

Our clients range from growth-focused entrepreneurial businesses through to leading multi-national organisations across many sectors and operating nationally and across borders.

For more information visit our website at www.rsm.global or our Linkedin, Twitter or Facebook pages.

Media Contacts

AIMA
Aidan Stanley
Corporate Communications Manager
AIMA
+44 (0)20 7822 8380
[email protected]

Hume Brophy
Laura Morrissey
Hume Brophy, London
+44 (0)20 7862 6399
[email protected]

Josh Nova
Managing Director
Hume Brophy, New York
+1 646 791 1201
[email protected]