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Hedge Funds

Smaller hedge funds able to turn profit with less than $100 million AUM — survey

Hedge fund managers are able to turn a profit and expand their business with less than $100 million in assets, shows a survey by the Alternative Investment Management Association and prime broker GPP.

AIMA and GPP conducted a joint survey of 135 sub-$500 million alternative money managers around the world and found that the average break-even point for is around $86 million in assets under management. Around one-third can break-even with $50 million or less.

Macro hedge funds had the highest break-even point at an average $132 million, while at the other end of the scale, alternative credit managers are able to turn a profit at the $77 million mark.

Management fees vary among the surveyed managers, with around half charging 1.5% or less. Hedge fund startups charge an average 1.25% management fee, according to the survey.

Regarding performance fees, around two-thirds of smaller alternative managers are charging less than 20%. Seventy-seven percent do not expect performance fees to change in the coming 12 months, while 11% think fees will fall. The remaining 12% expect an increase.

The survey also found a trend of aligning the interests between smaller managers and investors. Of those surveyed, 86% of funds said they have a high watermark, while 32% have hurdle rates in place. Fee clawbacks under certain conditions are in use by 8% of managers.

However, regulatory costs are weighing on these firms, with 89% of respondents allocating up to 20% of total expenditure to compliance.

"Our research disproves the notion that only relatively large, institutionalized businesses can succeed in the modern hedge fund industry," said Jack Inglis, CEO at AIMA, in a statement accompanying the survey. "This is good news not only for the future health and well-being of the sector but for investors too, since smaller managers have often been the source of many of the industry's greatest innovations."

The survey is available on AIMA's website.