Hedge funds increase co-investment and customise offerings with investors

Jack Inglis, AIMA CEO; AIMA’s Global Investor Steering Group; Jonathan Waterman, National Asset Management leader, RSM US

Results from a survey undertaken by AIMA and RSM show the classic ‘2 and 20’ fee model is no longer the standard structure charged by the hedge fund industry. As fund managers (‘managers’) and investors focus on customisation and deeper partnerships to align interests, attention is no longer solely on fees.

The survey shows a new average management fee of 1.3% of assets under management (AUM) and 1.4% for new funds launched in the past 12 months. Discussions with managers and investors during the research reveal a shared belief that managers’ share of alpha should be about one third.

Findings demonstrate that a maturing industry and institutional investor base now require hedge funds to deliver customised solutions, closer collaboration and closer communication. Over half of surveyed managers now use customised investment solutions, and the survey suggests that managers who can respond to individual investor needs are best positioned to grow. The importance of customisation is a significant development from the findings of AIMA’s 2016 ‘In Concert’ survey, which suggested fees and fund structures were then the focus of efforts to align interests.

Over 75% of managers see a mutual desire for a long-term investment commitment or an exchange of knowledge with investors as essential. The importance of ‘skin in the game’ to demonstrate partnership was confirmed by 76% of surveyed managers, who revealed they have significant personal capital invested in their funds. Nearly all respondents have a performance fee high-water mark with their investors and almost 40% use hurdle rates to set a minimum return for client(s) before a performance fee can be charged. Nearly 80% of managers would reduce management fees in return for a greater share of performance.

Jack Inglis, AIMA CEO, commented: “Hedge fund managers are being responsive to investor requirements. The results of our survey reflect an ability to partner with investors to deliver the investment solutions they need on mutually agreed terms. “No longer are the interests of investors and managers aligned solely through fee arrangements. A collaborative partnership, based on clear communication, has enabled the customised, solutions-based approach that investors want from the modern hedge fund manager.”

AIMA’s Global Investor Steering Group said: “Investors want alternative asset managers that can respond to their individual requirements, but requirements can vary. In recent years hedge fund managers have demonstrated more flexibility and willingness to collaborate with investors to customise their products and share their expertise. This is as important as the ability to offer competitive fees and a differentiated product. This research is an important demonstration of how hedge fund managers are responding to investor requirements and how their offering remains an essential part of a diversified portfolio.”

Jonathan Waterman, National Asset Management leader, RSM US stated: “Given we are ten years into a bull market, we’re not surprised by the results of the survey. Hedge funds have a unique flexibility and have long been known as force of innovation across the industry, especially in down markets when we see their true benefit rise to the top. “Their reputation is evolving, primarily due to the relationships built with investors. As this paper and the conversations taking place between managers and investors globally reveal, this is producing long-term partnerships which can tackle all investment environments.”




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