How Low Will Hedge Fund Fees Go in 2021?
Paying “1 and 15” will become the new norm for large institutions, according to one industry expert.
Hedge fund fees fell to a new low in 2020 — a trend that is expected to continue this year.
Hedge fund marketer Agecroft Partners expects a 1 percent management fee and 15 percent performance fee to become the new standard for large institutional investors as hedge funds seek to appease their most influential clients. The prediction was included in the capital raising firm’s forecast of the biggest trends driving the hedge fund industry in 2021.
“As the attention and pressure take effect, the hedge fund industry is experiencing a bifurcation of fees,” Agecroft said. “While 2 and 20 is no longer the norm, smaller investors are typically paying average fees of 1.5 and 20, while institutional investors are paying significantly lower fees with an estimated average of 1 and 15.”
In fact, fees are already closer to 1 and 15 than they are to 2 and 20 across the hedge fund industry, according to data tracked by Hedge Fund Research. HFR said in a December 30 report that average management fees had declined to 1.37 percent in the third quarter, while average performance fees slid to 16.36 percent. Both are the lowest levels on record, the research firm said.
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The continued decline in fees came after nine consecutive quarters of net redemptions from hedge funds, starting with the second quarter of 2018. In the first half of 2020, investors pulled a net $45.5 billion out of hedge funds, according to HFR.
The third quarter, however, saw hedge fund flows finally start to turn around, with HFR recording $13 billion in net inflows. It was also a good quarter for hedge fund launches, with 151 new funds debuting during the three-month period. By contrast, only 137 hedge funds shut down in the third quarter, the fewest since the second quarter of 2018.
Among newly launched funds, HFR said average management fees were 1.36 percent, slightly below the industry-wide average. Performance fees for funds launched in the third quarter, however, were 17.97 percent — about 1.6 percentage points higher than the industry average.
Beyond fee discounts, Agecroft said that hedge fund managers will also continue to offer fee provisions such as hurdles, performance fee crystallization periods, and lockups.
“Recognizing the importance of institutional clients, managers have continued to tailor fee terms to meet the specific needs of these large allocators,” Agecroft said.