Half of large investors now get onshore discounts as hedge funds grapple with fee pressures

Finance

Close to a third of hedge fund firms have now slashed management and performance fees, according to a new industry study, which suggests managers increasingly must offer discounts and other novel fee models to retain investor mandates.

The report, ‘European Alternative Investments 2020: Matching Different Demands’, published by Cerulli Associates, explores how falling risk-adjusted returns and competition from rival products such as private equity have prompted hedge funds to overhaul their fee structures.

Almost half of the large institutional investors—those with assets of more than EUR15 billion (USD16.8 billion)—surveyed by Cerulli said that they now always receive discounts for onshore hedge funds.

While hedge fund managers are willing to offer lower fees for large and strategically important clients, they typically offer meaningful discounts only on large mandates and for clients that offer cross-selling opportunities.

Just over half (52 per cent) of institutional investors said the discounts they achieve for onshore hedge funds range from 1 per cent to 10 per cent, while close to a quarter (26 per cent) said that, on average, they achieve a discount of up to 20 per cent.

Strategies that offer higher alpha tend to be discounted less, the reported found.

Just one-third of respondents said that they always get discounts for offshore hedge funds. Cerulli expects to see more innovative fee structures for Cayman funds than for UCITS hedge funds.

“To survive fee pressure, asset managers must adapt,” said Justina Deveikyte, associate director of Cerulli’s institutional research and the report’s lead author.

The study found that some 14 per cent of fund managers surveyed said they plan to introduce longevity fee structures and innovative fee structures in the next 12 months.

“They should use innovative fee structures to better align interests and demonstrate value. However, it is important that new, creative pricing models offer fresh choices without overwhelming clients. Managers should consider introducing longevity fees or charging lower management but higher performance fees,” Deveikyte added.