For many Asia hedge funds, 2019 was a good year — just not good enough to allow them to charge performance fees.
More than 73% of Asia-based or Asia-focused firms made money in 2019, according to data from Eurekahedge. But almost 71% of those finished the year under their so-called high-water mark, or the historical peak net asset value above which hedge funds can charge performance fees.
Hedge funds around the world have come under pressure to cut fees while coping with mounting competition as well as rising operational and regulatory costs. Management fees levied as a percentage of assets are generally used to cover basic expenses, while taking a cut of returns as a performance fee is typically used to incentivize employees.
Globally, it's become industry standard to charge performance fees only when the value of net assets exceed high-water marks. But some funds have also begun cutting management fees — in several cases to zero — as they move toward a model that relies on performance fees to better align their interests with those of clients.
With less money in the kitty for performance fees, the ability to pay bonuses, and therefore retain staff, becomes an issue.
According to annual surveys by recruitment firm Robert Walters of funds with assets of at least $100 million, analysts and portfolio managers at Hong Kong-based hedge funds took home performance bonuses twice to more than 15 times their base salaries in 2018. This year's bonuses, as rewards for 2019 performance, have dropped significantly, the latest survey shows.
Among those Asia hedge funds whose 2019 gains were insufficient to recoup previous years' losses were Foundation Asset Management's namesake China opportunity fund and Adam Levinson's Graticule Asia Macro Fund.
The former rose 3.4% in 2019 after declining 18% in 2018, according to an investor newsletter seen by Bloomberg. Graticule Asia Macro Fund, one of the largest macro hedge funds in the region, returned 2.9% in 2019 after an 8.2% loss in 2018, according to a letter sent to investors.
Representatives from Foundation and Graticule didn't immediately respond to a request for comment.
In reality, high-water marks differ for various investors in the same fund, depending on when they invested. That means funds with reported returns under their high-water mark may still be able to levy performance fees on some clients.
Investors dissatisfied with lackluster performance yanked $81.5 billion from the $3.3 trillion global hedge fund industry last year, according to eVestment data. Liquidations have outstripped new starts for five years, Hedge Fund Research Inc. data show.
The Eurekahedge Asian Hedge Fund Index advanced almost 10% last year, beating the 8.7% increase in the global gauge.
An estimated 81 Asia hedge funds were liquidated in 2019, the second-highest figure in six years and coming on the heels of 95 closures in 2018, according to Eurekahedge.