Citi survey finds '2/20' fading
10 December 2013 New York
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The business of hedge funds is caught between rising costs and falling management fees, holding little profit for managers that do not perform, according to a survey.
The Citi Prime Finance 2013 Business Expense Benchmark Survey found that the traditional ‘2 and 20’ model of investment manager compensation—2 percent management fee and 20 percent of the profits—has declined to fee levels as low as 1.58 percent of assets under management for all but the largest managers.
As a result, hedge fund managers, unlike their counterparts in traditional, long-only funds, barely break even simply collecting fees.
For example, after paying expenses, funds with $500 million in AUM realise operating margins of 69 basis points (bps), rising to 82 bps for a manager overseeing $900 million, survey data showed.
Alan Pace, global head of prime brokerage and client experience at Citi, said: “Fee compression continues to reshape the business of hedge funds, lowering fees even as expenses rise, all but eliminating fee-only operating margins, and raising the level of assets needed for a hedge fund business to succeed.”
“And while it’s clear that there is little room for additional downward pressure on management fees, at current average fee levels, investor-manager interests are well aligned—both parties are focused on performance.”
The survey was conducted across 124 hedge fund firms in North America, Europe and Asia representing $465 billion, more than 18 percent of total industry assets.
The Citi Prime Finance 2013 Business Expense Benchmark Survey found that the traditional ‘2 and 20’ model of investment manager compensation—2 percent management fee and 20 percent of the profits—has declined to fee levels as low as 1.58 percent of assets under management for all but the largest managers.
As a result, hedge fund managers, unlike their counterparts in traditional, long-only funds, barely break even simply collecting fees.
For example, after paying expenses, funds with $500 million in AUM realise operating margins of 69 basis points (bps), rising to 82 bps for a manager overseeing $900 million, survey data showed.
Alan Pace, global head of prime brokerage and client experience at Citi, said: “Fee compression continues to reshape the business of hedge funds, lowering fees even as expenses rise, all but eliminating fee-only operating margins, and raising the level of assets needed for a hedge fund business to succeed.”
“And while it’s clear that there is little room for additional downward pressure on management fees, at current average fee levels, investor-manager interests are well aligned—both parties are focused on performance.”
The survey was conducted across 124 hedge fund firms in North America, Europe and Asia representing $465 billion, more than 18 percent of total industry assets.
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