New and emerging hedge funds face declining fees while costs remain high
2013-03-15 – London
It has been a volatile time for hedge funds for some years, with the number of new hedge funds and closures of failing hedge funds both steadily rising.
According to Hedge Fund Research (HFR), the leading provider of research and analysis for the global hedge fund industry, during 2012 almost one in ten of the estimated 9,800 total funds were liquidated, a trend which has been gaining pace over the last three years. According to the latest HFR Market Microstructure Industry Report, total hedge fund industry assets increased to a record of US$2.25 trillion.
Performance of hedge funds has steadily improved during 2012, with the top decile of all HFRI constituents posting an average return of +32.6% for 2012 (up from 19.5% in 2011), and the bottom decile posting an average return of -16.0% (up from -30.7% in 2011). However, the average hedge fund has only just managed to turn a profit over the last two years. Moreover, a simple portfolio of index funds would have easily out-performed many funds over the same period.
Chart 1: Hedge fund performance
Along with the difficult environment, funds are facing increasing costs and tougher regulatory requirements. Although annual management fees have remained fairly constant, performance fees are facing continued downward pressure. Management and incentive fees declined, with average management fees falling by 1 bps to 1.56%, while average incentive fees fell to 18.54%, a decline of 17 bps for 2012.
Small and medium-sized hedge funds will require a more efficient and lean cost base, according to Daniel de Bruin, managing partner at Modelling Design Partners. “New and emerging hedge funds will need to focus on efficiency savings and cost reductions while their management and incentive fees see such continued declines. Such efficiency savings and improvements will require a focus on more intelligent use of resources through process automation and data analytics tools.”
A combined approach of using cost effective fund management software, and the latest data analytics and data fusion tools, may allow new and emerging hedge funds to compete successfully with large established hedge funds in the current market. In general, the current financial climate remains very tough for new and emerging hedge funds.
Kenneth J. Heinz, President of HFR, agrees, “Despite total industry assets increasing to a record level, the capital raising environment continued to be challenging for emerging managers, including both small and mid-sized funds, as well as newly launched funds. While emerging manager performance has been strong, the bulk of the capital raised in the past two years has been allocated to the industry’s most well-established firms.”
The full HFR press release can be viewed on their website:
https://www.hedgefundresearch.com/pdf/pr_20130314.pdf
