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Hedge Funds Accede to Demands for New Fee Structures

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With investor pressure on fund charges heating up, 72% of hedge fund managers in a recent survey said they were implementing new fee structures, Citco and HFM Global reported Wednesday.

“Investors have been demanding an increased alignment of interest on fees for some time and this research reveals the huge number of managers who have been listening and, more importantly, acting,” Paul McMillan, HFM Global’s head of editorial, said in a statement.

“We have been talking to a range experienced managers in recent months who have been introducing new fee agreements, often with lower management fees and higher performance fees that are subject to a hurdle.”

Some investors, McMillan said, feel such structures reward genuine outperformance and not subpar returns.

Investor unhappiness about their hedge fund allocations surged in 2016 and continued into this year, alternatives data provider Preqin recently reported.

At the end of last year, 64% of investors in interviews with Preqin said fees, along with performance, were a key issue affecting the hedge fund sector. Sixty-nine percent said manager-investor interests were not aligned — a big reversal from 2015, when 69% thought there were aligned.

However, 55% of investors reported that they had seen an improvement in their favor in the terms and conditions charged by their fund managers over the course of 2016. Still, 76% demanded further improvements this year.

The Citco/HFM Global research, based on responses from 225 hedge fund firms, found that managed account structures, which offer investors increased control and transparency, were the biggest source of investments for 19% of managers globally, rising to 28% among U.S. managers.

Only half of managers reported that traditional onshore/offshore hedge fund strategies were now their biggest source of inflows.

Thirteen percent of managers said alternative UCITS funds were their biggest source of inflows, compared with just 4% who said the same about U.S. alternative ’40 Act Funds — investor sentiment toward these vehicles has turned negative over the past two years, the study said.

Sixty percent of hedge fund firms in the survey said they provide customized portfolios to attract new investors, while 30% offer special liquidity terms and about the same percentage offer targeted returns.

The research showed that hedge funds were diversifying into new strategies, with 41% of managers planning to move into a new strategy in the next 12 months.

Seventeen percent of managers said they would look to long/short equity as their diversification route, 11% to commodity trading advisors and 8% to global macro.

Managers in the survey favored private bank platforms as the most effective way of generating inflows, giving these an average favorability score of 3.02 out of five, ahead of the following:

  • UCITS, 2.91
  • Managed account platforms, 2.89
  • Cap intro, 2.72
  • Third-party marketers, 2.49

Sixty-two percent of hedge fund firms said they did not outsource any part of their distribution function.

However, firms based in the U.K. appeared to be more open to doing so, with 42% of managers saying they would consider outsourcing distribution.

— Check out Hedge Fund Investor Disaffection Continues in 2017: Preqin on ThinkAdvisor.