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June 21, 2023 08:30 AM

Established hedge funds charge more in management fees than newer rivals – survey

Cheyenne Ligon
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    Established U.S.-based hedge funds — defined as those with more than $1 billion in assets under management and more than five years in business — are charging a whopping 34% more in management fees than their newly established competitors, according to data from a new survey by law firm Seward & Kissel released Tuesday.

    Seward & Kissel's first Established Manager Hedge Fund Survey follows up on the firm's long-running annual New Manager Hedge Fund Survey. The survey asked the firm's hedge fund manager clients about their investment strategies, management fees, incentive allocations, withdrawal terms and fund structure. Though a report on the survey's findings did not specify how many firms responded to the survey, Seward & Kissel represents about half of the largest 100 hedge funds in the world.

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    The survey found a significant difference of 48 basis points in management fee rates between established managers and their newer competitors. For traditional equity strategy funds, established managers reported an average 1.9% management fee, while newer managers reported an average 1.42% fee.

    "We believe that this difference may be partly attributable to the greater bargaining power possessed by Established Managers and the significantly higher overhead costs often borne to them due to much larger staffs," the report said.

    Within established hedge funds, the survey found that management fees vary widely depending on the type of fund. In customized strategy funds, which are intended to take advantage of persistent high inflation and high interest rates, management fees were much lower. Established managers reported an average rate of 0.93% in management fees for customized strategy funds, compared with 1.9% for traditional funds.

    "The difference in management fees between established funds employing traditional and bespoke strategies is dramatic but not unexpected, reflecting the fact that bespoke funds are much less alpha-focused," said Nicholas R. Miller, a partner at Seward & Kissel and lead author of the report.

    The survey also found that established hedge fund managers charge more in performance fees, or incentive allocation rates. For their traditional strategies, established hedge fund managers that responded to Seward & Kissel's survey reported a consistent 20% incentive allocation rate, while newer funds had an average 18.75% incentive allocation rate, representing a premium of 125 basis points for established funds.

    The firm attributed the difference in performance fees to "the challenges being encountered by new managers seeking to raise capital in the current environment."

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    October 23, 2023 page one

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