Study Finds '2 and 20' Not the Only Game in Town

LONDON (HedgeWorld.com)–Fee structures for hedge funds vary more than some investors are aware, and fund managers might ponder whether altering how and how much they charge could affect the attractiveness of their product, according to a study by Fitzrovia.

The study, titled “Benchmarking Performance Fees,” found that one-third of the alternative investment funds studied charge a performance fee other than 20% of net gains. Fitzrovia also found that the straight mean average annual management charge among the alternative funds studied is 1.47%, about 25% lower than the 2% percent commonly regarded as standard. About 18% of the funds charge less than 2%, and approximately 7% charge more.

For the report, Fitzrovia surveyed the fee structures of 2,442 funds, of which 393 are in the “alternative investments” category; most of those are conventional hedge funds.

While the survey found that 87% of the alternative funds use a high watermark–so investors don’t pay performance fees on a recovery to a previous high–just 2% of the funds reset their mark after a defined period of time. In its commentary on the findings, Fitzrovia suggests that both managers and investors could benefit if the watermark was reset after a period of one to three years.

The reports’ authors also state that hedge fund managers, in looking at these figures, might do well “to take a more pro-active approach to their fiduciary responsibilities and to address criticisms of their fee structures.” The commentary notes that a U.S. Securities and Exchange Commission staff report observed that the prevailing fee schedules for hedge funds are sometimes referred to as “heads I win, tails you lose.”

With its report, Fitzrovia provided this checklist for examining a fund’s fees: