With many hedge funds delivering long-only or beta-type returns over the past decade, downward pressure on fees has intensified in recent years, and the ways in which start-up managers can look to draw allocator money has been the focus of fierce debate as fee models have shifted.
With many hedge funds delivering long-only or beta-type returns over the past decade, downward pressure on fees has intensified in recent years, and the ways in which start-up managers can look to draw allocator money has been the focus of fierce debate as fee models have shifted.
The traditional ‘Two and Twenty’ fee model – for years a cornerstone of the hedge fund industry – largely does not exist today for most managers, though that does not mean certain well-established managers aren’t still able to charge such fees, according to Stephane Berthet, founder of Hyphen Alternative Advisors, and moderator of the fees-focused panel at this year’s hedgeweekLIVE European Emerging Managers Summit.
Overall, average fees have come down to somewhere in the region of between 1-1.5 per cent for management, and anywhere between 10-15 per cent and 20 per cent for performance, the session heard, with speakers noting that emerging managers will increasingly often offer lower fees during the start-up phase in order to attract investor capital.
The discussion heard how fee models are increasingly shaped by a broad sweep of factors including business model, investment strategy, the amount of working capital required, and the level of liquidity. Speakers also mulled the merits of fee negotiation, founders’ share classes, lock-ups and other terms and structures.
“When we launched it was a one-size-fits-all, two-and-twenty model. That is not where the market is today,” observed Richard Lamplough, CEO of Lancaster Investment Management, which launched in 2008 and manages long/short and long-only funds.
Investors now have different needs and desires, and value different things in different ways, Lamplough said, adding fee models should be built around alignment and a sense of fairness.
He also suggested the industry has become increasingly skewed, in which large multi-manager, multi-PM shops can charge investors “huge fees with little or no liquidity.”
Alyx Wood, chief investment officer at Kernow Asset Management, acknowledged that the question of fees can often prove a thorny issue between managers and investors, and said he would rather be talking about stocks and strategy with clients.
Sharing his experience of external investors, Wood – whose UK equities-focused long/short contrarian fund launched in 2019 – recalled one early discussion with a client who observed of fee structures: “You want to be embarrassingly cheap at the beginning, and reassuringly expensive afterwards.”
“It’s all about trust. It’s a people business – you’ve got to take people on a five-year journey,” Wood remarked. “Hopefully you get the clients you deserve.”
Noting how there has to be a degree of “give and take” between hedge fund manager and investor, Patrick Ghali, managing partner and co-founder of global institutional investment advisor Sussex Partners, believes that fees have to be in line with the strategy.
“If you have something that is incredibly scarce, then you can charge for that; something which annualises at a crazy number, on a risk-adjusted basis it’s fantastic, and is incredibly consistent and is hard to replicate – that’s going to cost money,” Ghali explained. “But if you have something that’s commodity, you cannot charge for that – something you can get from 500 people, [investors] are not going to be paying for that.”
Reflecting more broadly on the changing shape of hedge fund fees and how fee structures relate to management firms’ business models, he noted that while fees in general fees have come down, investors want to ensure the business is stable. “Investors don’t want business risk; they’re not venture capitalists,” he added.
