Many hedge fund managers are willing to negotiate lower management fees with investors, but far fewer are willing to budge on performance fees, according to a new report from eVestment.
The State of Institutional Fees Report: Hedge Funds, released today.
Of the hedge fund managers covered in The State of Institutional Fees Report: Hedge Funds, 38.8 per cent negotiated their management fees while only 11.3 per cent 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.
The report provides an overview of stated and negotiated fees from a sample of 180 recent hedge fund commitments made by 50 US 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.
According to the report, the most common management fees were 1 per cent (for managed futures and funds of hedge funds), 1.5 per cent (equity and multi-strategy funds) and 2 per cent (fixed income funds). Event driven/distressed and macro funds charged 1.5 per cent and 2 per cent with the same frequency. The most common agreed upon performance fee among all direct hedge funds was the oft referenced 20 per cent; for funds of hedge funds it was 10 per cent.
Managed futures funds meanwhile, offered the lowest negotiated fees for public plans among direct hedge fund strategies, charging an average 0.7 per cent in management and 16.4 per cent 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 USD133 million was the average commitment size with a performance fee reduction; USD52 million was the average commitment size showing no change in management fees and USD55 million showing no change for performance fees.
