Investors appear to be getting smart about picking winning hedge fund managers, choosing those that boost performance fees and either slash or dump management fees. Reuters reports that investors are looking at a firm’s fee structures to determine how much of its AUM is coming from asset gathering and how much from the toil and sweat of managers seeking higher returns. According to Reuters, some of the oldest, best-performing hedge funds are dropping management fees of 1% and 2% altogether but pushing up what they charge for performance from the industry standard 20% to up to 50%. “Today, you are seeing excess demand for the managers with the highest fees and little demand for managers that are cutting fees,” Steven Drobny of Drobny Global Advisors told Reuters. Adds Sunil Chadda, hedge fund adviser at consultant Citisoft, “If you want performance, you pay for it.” Investors can develop their own formula for who’s gathering and who’s working to build returns. Returns of 10% or more suggests that the HF is actively pursuing gains, while a 2% management fee at a $12 billion hedge fund may indicate the firm doesn’t need performance fees to stay in business. Nicholas Campiche of Pictet & Cie said in a Reuters interview that there is a danger of relying solely on performance fees: If in one year a hedge fund “hits a soft patch in performance or maybe has a negative year, then the business can’t really be sustained.”
