Key Trends in Hedge Fund Fees

by Simon Dhadwal

  • 08 Oct 2012
  • HF

Preqin has been conducting research on trends in the fees charged by hedge fund managers since 2008. Our most recent data indicates that the perceived ‘industry norm’ management fee of 2% has fallen to a mean of 1.64% across all single-manager hedge funds. Similarly, there has been a decrease from the usual 20% performance fee to an average of 19.20% for all single-manager funds. The mean management fee for fund of hedge funds is 1.31%, with a 7.96% mean performance fee. One reason behind these changes in fees is that hedge fund managers are often proactively offering concessions on fees in response to investor demand and in order to entice further investment in the asset class.

Forty-seven percent of single-manager funds charge a management fee of 2%. However, a much larger majority of funds (80.3%) charge the ‘industry standard’ 20% incentive fee. Funds with a relative value strategy are charging the lowest average management fee at 1.50%. Within relative value funds, fixed income arbitrage vehicles charge the lowest management fees. These vehicles’ 1.35% mean management fee is also complemented by a 16.97% mean performance fee. However, investors must accept a longer average lock-up period of 6 months compared to a 4 month average lock-up across all single-manager relative value funds.

Conversely, global macro strategies charge the highest management and performance fees of any strategy and prove to be closest to the 2/20 fee structure. Single-manager global macro strategies record a 1.76% mean management fee and a 19.75% mean performance fee.

On average, Asia-based single-manager hedge funds charge the lowest fees in the industry. Asia-based fund managers levy an average management fee of 1.61% alongside a mean performance fee of 18.36%. These managers are conscious of the need to appeal to investors in the ever growing Asian market. Meanwhile, Europe and North America-based single fund managers continue to charge higher fees than their Asia-based counterparts. Europe and North America-based managers are identical in the 1.64% average management fee they charge, but they differ with respect to their attitude on performance fees. As the indisputable centre of hedge fund activity, North America shows little sign of departing from the 20% incentive fee structure and this is reflected by a 19.86% mean fee compared to the 18.54% average levied by Europe-based single hedge fund managers.

Overall, it is clear there is a huge amount of variation in the level of fees charged by hedge fund managers across strategies and regions. Management fees show the greatest reductions in the 2% standard, with some strategies charging as low as 1.35% on average for management services. Performance fees have been more resilient in the face of investor pressure for fee reduction, with 20% remaining the norm for 80% of the industry.

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