Nearly all hedge fund managers — 97% — use a high-water mark in calculating the performance fee for their funds, but only 33% include hurdle rates in their fee formula, a new survey said.
The survey of 120 hedge fund firms managing an aggregate $500 billion conducted by the Alternative Investment Management Association found that 79% of hedge fund managers had not changed their hurdle rates over the past five years. About 16% of managers increased their hurdle rate and just 5% reduced it over the same time period.
“In Concert,” the AIMA survey report released Monday, showed that 60% of hedge fund respondents use a fixed percentage greater than 3% as their hurdle rate benchmark, while 20% of managers employ a fixed percentage between zero and 1% and 20% have a fixed percentage between 1.01% and 1.5%.
More than three-quarters (77%) of hedge fund companies said they would consider introducing a tiered fee structure as their assets grew.
“Hedge fund managers require a high management fee to be paid in the early life of their fund, amidst having to pay fixed operating costs from a lower (assets under management) base,” the report's authors wrote, adding “however, as the AUM of the fund grows and the fund benefits from … increasing economies of scale, it can operate more efficiently.”
The willingness of a hedge fund company to reduce fees seems to have a size component, as the survey showed that about 55% of firms managing more than $5 billion are likely to reduce either its performance or management fee, while about 88% of firms with less than $100 million would reduce the performance fee, the management fee or both.
None of the midrange firms managing between $250 million and $499 million surveyed, by contrast, said they would only reduce their performance fee; about 45% would reduce their management fee; approximately 10% would reduce both fees; and 45% said they would reduce neither fee.