Hedge Fund Management Fees Fall to Record Low

The industry lowered its management fees during the first quarter as firms created more new hedge funds than they closed.

Illustration by II

Illustration by II

Hedge funds are getting cheaper as the industry seeks to lure investors after years of disappointing performance.

Average management fees declined to a record low of 1.43 percent in the first quarter, according to a statement Wednesday from Hedge Fund Research, which began tracking the data in 2008. New funds formed in the first quarter charged 1.19 percent, down from 1.34 percent last year.

The industry’s assets rose to a new high of $3.215 trillion as managers created more funds than they liquidated during the first three months of this year, according to HFR. The data provider’s president, Kenneth Heinz, expects strategies and performance through mid-2018 will be influenced by the threat of tariff wars, mergers and acquisitions in media and telecom, and technology trends.

“Hedge fund industry growth has continued to record levels, with fund strategies and structures evolving as both fees and liquidity continue to influence investor allocation decisions,” Heinz said in the statement. “Hedge fund positioning has shifted from the equity beta that dominated 2017 to more sophisticated, strategic exposures on complex and volatile themes.”

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Hedge funds have returned 1.4 percent this year through May, with gains led by equity investments in technology, health care and energy. Event-driven investment strategies, as well as those focused on relative value arbitrage, also helped drive returns, HFR said.

Investors have been demanding lower fees amid a historically narrow gap between the best and worst-performing hedge funds, according to HFR.

The industry’s traditional “2-and-20” fee structure is no longer widely used, HFR said, estimating that just 30 percent of hedge funds now charge 2 percent management fees while demanding 20 percent for performance.

Average incentive fees rose 2 basis points during the first quarter to 17.11 percent, according to the data provider, as the industry continues its comeback following lackluster results after the financial crisis.

Hedge funds returned 8.59 percent last year and 5.44 percent in 2016, according to HFR. The gains came after an average 1.12 percent loss in 2015.