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A New Era for Hedge Fund Fees? – February 2014

Data from Preqin’s Hedge Fund Analyst online service shows that 2013 was a year of historically low fees among new fund launches. At 1.43% and 17.14% respectively, the average management and performance fees for new launches in 2013 were a long way off the once standard “2/20” fee structure. With the Preqin hedge fund benchmarks showing that the industry generated negative returns in 2011 and below benchmark returns in 2012, these reduced fees were a necessity for many new managers seeking to raise capital. 

The 2014 Preqin Global Hedge Fund Report shows that there was a significant decrease in investor satisfaction with regards to fund performance across 2011 and 2012. Forty percent and 41% of investors surveyed at the end of 2011 and 2012 respectively revealed that hedge fund returns did not meet their expectations for the year. Further to this, of the investors surveyed at the end of 2012, only 3% said that returns for the year had exceeded their expectations. These figures offer a stark contrast to the 72% of investors whose return expectations were either met or exceeded in 2010. With 48% of hedge fund managers surveyed at the end of 2012 predicting that fundraising would be a significant challenge in the year ahead, it was unsurprising that 2013 launches boasted lower management and performance fees than seen in previous years. 

Since the fallout of 2008, investors have become more selective and have typically been allocating fresh capital to a handful of established names. With an increasingly competitive market, managers launching in 2013 were more concerned than ever with raising sufficient capital to compete. As such, large mandates and seed/early stage investment were cited by managers as the two most common reasons for lowering fees, when over 100 fund managers were surveyed for the 2014 Preqin Global Hedge Fund Report

2013, however, saw an improvement in hedge fund returns compared with the previous two years, as well as a decrease in expectations from investors. This improvement translated into a vast increase in investor satisfaction. Of all investors surveyed at the end of 2013, a combined 84% said that their expectations for hedge fund returns had been either met or exceeded. With just 23% of fund managers surveyed predicting significant fundraising challenges in the year ahead, the outlook for the industry seems more positive. Will this renewed interest in hedge funds lead to 2014 fund launches attempting to push fees back towards their previous highs? Or are we now looking at a new standard of lower hedge fund industry fees?

Keywords: Hedge Fund, performance fees, industry fees