Fees for hedge funds not hit by client bartering

Michael Bow
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HEDGE fund fees are failing to fall past traditional levels despite increased negotiations and pressure from investors to cut them, a major study out yesterday reveals.

Figures show a 40 per cent surge in the number of investors who tried to negotiate better fees ­with hedge funds last year, with 71 per cent of investors trying to get better fees.

Hedge funds traditionally deploy a “2 and 20” model, charging two per cent on the money they manage and a 20 per cent cut of any profits earned on the fund as a performance fee.

Around one-third of investors have a good success rate negotiating fees in their favour, data shows, but the majority still paid a flat rate of between 1.5 per cent and two per cent last year. Three-quarters pay between 17.5 per cent and 20 per cent as a performance fee.

The figures, compiled by Deutsche Bank yesterday, offer one of the most comprehensive polls of alternative investment managers, surveying investors worth around half of all hedge fund assets in the world.

Despite fee levels, figures also show investors plan to allocate a further $123bn (£81bn) to funds this year.

With a further $169bn expected to be added from better performance, investors believe global assets in 2013 will hit a new high of $2.5 trillion.

Deutsche global head of capital introduction Anita Nemes said: “Top performing managers continue to dominate, but besides performance, aligning interests with those of the investor is also critical in order to win attention from an increasingly institutional investor base,”

One future battleground on fees could be the introduction of so-called “hurdle rates”, which mean managers only collect a bonus if they clear a certain rate of return.

Some 83 per cent of investors think managers should have a hurdle, up from just 13 per cent a decade ago. Despite this, Hedge Fund Intelligence data shows 84 per cent of hedge funds do not have a hurdle rate.