LONDON (HedgeWorld.com)–Hedge fund performance fees amassed in the bull markets of 1996 through 1999 were significantly higher than the fees gathered by managers in the years 2000 through 2002.

This is what researchers at Fitzrovia International plc discovered in their latest research into the total expense ratios of offshore hedge funds domiciled in Bermuda, the British Virgin Islands, Cayman Islands, Dublin, Ireland and Luxembourg.

Altogether the fees of 427 alternative investment funds with the average assets of US$147.6 million were included in the report.

The report shows that there are many alternative investment funds that do generate performance fees that are at least partly linked to stock market movements, said Ed Moisson, associate director, communications at Fitzrovia. When stock markets do well, the fee revenues generated by fund companies’ in the form of performance fees grows to 6.31% of net assets on top of annual management fees.

Another key finding was that in comparison to actively managed equity funds, the fees charged by hedge funds may seem more reasonable in that they have moved downward in lockstep with the markets as the fees on the long-only side continue to rise. Looking at fees charged in the 10 years ending 2002, Fitzrovia officials found that the total expense ratios of active long-only managers in the last two or three years have increased.

In figuring total expense ratios of the funds, Fitzrovia looked at annual non-management costs. Overall the average total expense ratio for hedge funds is 27.7% (weighted average) higher than the quoted annual charge. When performance fees are included in the overall picture, investors can be expected to pay almost 4% a year in annual fees, according to Fitzrovia.

The report uncovered that the weighted average total expense ratio (which includes management fees) dipped from 2.21% in 1996 to 1.83% in 2002. On a straight mean average the difference is even greater with the total expense ratio falling to 2.38% in 2002 from 3.93% in 1996.

According to the study, part of the reason for the lower fees may be due to the fact that new fund launches tend to have lower management fees than average. Also, larger funds tend to have low management fees.

Fitzrovia’s research also indicates that by weighing the figures by fund assets, management fees have stayed at virtually the same level for the past four years. Overall total expense ratios have stayed at a “very similar” level for the past three years. Authors of the report suggest that larger hedge funds are maintaining their operating costs as smaller funds’ average total expense ratios are getting lower.

The average fund size in the study grew to US$153.5 million in 2002 from US$79.9 million in 1996.

Looking at the range of fees by domicile, Dublin leads the way as the most expensive jurisdiction with a weighted average total expense ratio of 2.22% and a weighted average performance fee of 1.58% to total 3.32% in fees for its hedge funds.

Fitzrovia traditionally produces annual market share studies of offshore fund domiciles. Its next report on Luxembourg is due out in April, according to Mr. Moisson.

SBarreto@HedgeWorld.com