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Hedge Funds Make Some Concessions But Resist Fee Overhauls

New fee models like Texas Teachers’ 1-or-30 structure have not yet caught on with hedge fund managers.

  • By Amy Whyte

Hedge fund managers may have produced better returns last year, but they aren’t off the hook when it comes to fees.

Fund managers polled by Preqin said they continue to face demand from investors for more favorable fee structures. Fifty-seven percent predicted that pressure on fees would be a key driver of change in the industry this year, according to the survey, which was conducted in November and released this week.

Already, hedge funds have made a number of concessions on fees, including adding high-water marks, a provision preventing managers from earning performance fees when they lose money. Eighty-six percent of managers surveyed by Preqin said they offered high-water marks on at least one if not all of their funds.

Other popular fee structures included tiered fee levels, which 39 percent of hedge funds firms offered, and hurdle rates, which 40 percent implemented, according to the survey. An additional 20 percent were open to adding tiered fee levels, while 14 percent said they may offer hurdle rates in the future.

The hedge fund managers surveyed by Preqin gave a number of reasons why they have offered fee concessions, including giving discounts in exchange for large mandates, seed capital, or early-stage investments. A smaller number said they traded favorable fees for longer lock-up periods.

The new 1-or-30 fee format developed by Albourne Partners and the Teacher Retirement System of Texas has not yet gained much traction with managers. Only 4 percent of fund managers surveyed by Preqin were using the structure, with 27 percent open to adopting it. That leaves about 69 percent of respondents opposed to the 1-or-30 model.

[II Deep Dive: Inside Texas Teachers’ Hedge Fund Power Move]

While concessions are being made, the discounts and structures managers are willing to offer don’t fully match up with what investors want, according to Preqin.

For instance, 57 percent of investors surveyed by the data firm in December wanted both management fees and performance fees reduced in 2018, but only 33 percent of hedge fund managers said such fee reductions were likely. Instead, the majority of managers said they would most likely reduce management fees only.

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