Alternative asset managers are changing their business models, finds a new survey by the Alternative Investment Management Association (AIMA) and consulting firm RSM US.
The survey included 120 alternative investment fund management firms with AUM of more than $500 billion, and it examined aspects such as the design of manager compensation.
The resulting report identifies several emerging trends, says AIMA, including the growing use of so-called claw backs; this is when a share of past performance fees are returned to investors during loss-making periods. More managers are also investing their own personal capital alongside investors’.
“Since the global financial crisis, the nature of the relationship between hedge fund managers and investors has undergone tremendous change,” says Michelle McGregor Smith, chairman of the AIMA Investor Steering Committee, in the report. This change has been “driven in large part by investor demands for greater transparency.”
- One in three managers now charge performance fees above a hurdle rate. The report explains, “The deployment of a hurdle rate in a hedge fund means that a manager cannot charge a performance fee until the fund’s performance exceeds a pre-determined target. So, for example, if a fund sets a hurdle of 5% and returns 15%, performance fees would only apply to the 10% above the hurdle.”
- Most managers (77%) offer or are considering offering a sliding fee scale, whereby management fees are reduced as the fund raises assets above particular thresholds.
- Almost all managers (97%) charge performance fees only above a high watermark; the fund’s highest previous value.
- It’s more common to see longer lock-ups in exchange for lower fees and other beneficial terms. The report says, “Investors in hedge funds are more open to ‘locking up’ their capital for a longer period of time in exchange for paying a reduced fee […] The client reduces the fee drag on performance, whilst the committed capital gives greater freedom to the hedge fund manager who does not need to hold as much cash on hand to meet potential redemption requests.”
- The majority of managers now calculate and charge performance fees annually, rather than throughout the year.
- More than half of managers (61%) say having a significant personal investment in their funds is the single most important method for aligning interest with their investors.
- Nearly half of managers (48%) offer or are considering offering co-investment to their investors, via particular investment opportunities or jointly-managed funds.
The findings of this survey build on a 2014 paper by AIMA and Barclays, which looked at the increase in partnerships between alternative investment funds and institutional investors.