The future of hedge fund fees
I've noted over the years that the traditional hedge fund fee structure, the age-old 2 and 20, was slowly disintegrating.
Breakingviews now says that the 2-and-20 era is officially dead. The catch is that this death will take place in roughly 2020.
In an article mockingly dated eight years ahead, the authors note, "In September 2012, the average hedge fund still charged 1.6 percent annually in management fees and collected 18.7 percent of any gains, according to data provider Preqin. Through November of that year, the average global hedge fund investor earned just 2.6 percent, according to the HFRX global index maintained by Hedge Fund Research. In 2011, investors lost nearly 9 percent. The average annual return from 2009 to 2012, supposedly recovery years following the losses of more than 20 percent in 2008, was a measly 3 percent."
What surprised the authors is how long it took.
"Neither the losses in the 2008 credit crunch nor the feeble returns during the ensuing seven-year euro zone crisis did much to bring down the archetypal fee structure."
So what accounts for the stubbornness of 2 and 20? It's hard to say. Some investors have demanded changes of their funds, especiallty when it comes to redemptions policies, third-party administration and the like. The biggest limited partners have indeed pushed for lower fees and managed accounts, but for the most part, the industry is managing to hang onto to its fat fee structure. But if performance doesn't improve meaningfully, the article may prove right.
- here's the article
Time to rethink hedge fund fees?