- The average break-even point fell 25% from $86M in 2017 to $64M.
- Two-thirds of investors will consider allocating hedge funds to managers with less than $100M in ASG.
- The average time to close new investments for emerging managers is 6.3 months on average and even less, 5.6 months, for fund managers under $100M.
The research established the existence of a community of hedge fund managers that weathered the recent macroeconomic turmoil and emerged stronger and more resilient than before. These managers achieved this result by reducing their costs wherever possible, including:
Sacrifice salarial
- It is not uncommon for the vast majority of the capital invested in a hedge fund emerging/young company, during its creation and throughout its first years, comes from the founders/directors.
- Increasingly, the first years will be lean in terms of return on investment, and this is even more the case than in previous years. It is also more common to favor wage cuts and other personal sacrifices to ensure the well-being of the company.
- Deferred compensation is an increasingly common practice with early-stage small business fund managers. It is also common for directors to reinvest all these carryovers into their fund.
More outsourcing?
- A joint KPMG/AIMA study from 2021 indicates that a growing number of hedge funds are expanding their outsourcing efforts. Investors are increasingly comfortable with the fact that hedge funds are outsourcing more, with some even pushing them to go further in this direction.
- The pandemic has forced hedge funds to seek to be even more efficient and has accelerated trends like outsourcing.
Less travel: more savings for business results
- There is no doubt that companies have saved on travel and entertainment costs and the acceptance of virtual connection (pre-check online etc.) has allowed companies to consider less travel in the coming.
Use of platforms
- The emergence of regulatory hosting platforms has allowed companies to self-manage at a fraction of the cost required to operate the compliance function entirely in-house. The popularity of these platforms with managers – and their acceptance by investors – has steadily grown over time, contributing to the overall reduction in costs in the industry.
Reduced office costs
- Another trend accelerated by the pandemic is the decision of some companies to move out of city centers to more remote locations, where the cost of living is lower.
Historically, fund managers have to have a track record of at least three years and net assets of over $100M before most investors actually consider them. On both counts, investors surveyed rejected these views, with data showing that the vast majority would consider a fund less than three years old and with less than $100m of ASG. Additionally, investors seem more willing to engage with managers earlier in their life cycle and take less time to accept new investments. Investors’ strategy preferences appear to closely match those offered by these managers, with long-short and multi-strategy equity strategies accounting for a total of 62%.
When it comes to management fees, this year’s survey showed no change from 2017, with the average management fee again standing at 1.4%. Notably, this year only 9% of fund managers are charging 2% or more, compared to 14% in 2017. Simultaneously, the range of 1% to 1.49% has increased from 36% in 2017 to 48% in 2022. other cost brackets remained more or less constant.
We have found for some time that the so-called “2 & 20” fee model is practically superfluous. This data point reinforces our view that the fee structure charged by hedge funds is becoming increasingly varied. Managers and investors are showing a willingness to work with different funds and fee structures to better meet investor demands and ensure their businesses remain viable. By strategy, long-short credit funds charge the highest fees (1.57%) while global macro funds are the most competitive in terms of fees (1.10%). Likewise, the average performance fee remained stable at around 16%.
In Canada, the fees are significantly lower than those conveyed by the stereotypes of 2% and 20%. Fundata reports that the average hedge fund management fee in Canada is 1.3% with an average performance fee of 16%, as of April 2022.