These days, most budding alternative investment management firms are able to turn a profit and expand with considerably less than $100 million in assets, according to a survey of sub-$500 milli0n firms by the Alternative Investment Management Association (AIMA) and boutique prime broker GPP.
The joint survey of more than 100 alternative asset managers from across the globe finds the average break-even point for such firms is around $86 milli0n, while around a third of respondents were are able to start profiting with only $50 million in assets or less.
The average break-even was highest among global macro hedge fund firms that responded to the survey ($132 million on average) and smallest for alternative credit fund managers ($77 million).
A look at fees
In terms of management fees, about half of respondents said they are charging 1.5% or less. For hedge fund start-up businesses, management fees were found to be around 1.25% on average. In terms of performance fees, about two-thirds of smaller managers said they are charging less than 20%.
Looking forward, about three quarters (77%) expect performance fees to remain unchanged over the next year, while 11% expect a decrease and 12% expect an increase.
The costs of regulation continue to weigh on smaller firms. Almost 90% of respondents said they allocate up to one-fifth of their total expenditure to compliance, with this number expected to increase.
When it comes to outsourcing services, legal services were found to be the most outsourced function among smaller firms, with only 16% filling this role internally. Meanwhile, COO and compliance functions were found to be more likely to be filled by in-house roles.
Survey methodology: One hundred and thirty-five small and emerging hedge fund managers worldwide, with $16 billion in combined AUM, were surveyed; half of the sample are five years old or less. AIMA and GPP also spoke to 25 institutional investors. Overall, about three-quarters of managers surveyed fall into the big six categories: equity long/short; global macro; fixed income/credit; CTA/futures; event-driven; and multi-strategy, say AIMA and GPP, while the rest include niche strategies such as risk premia, big data-driven investing, trade finance, long-only options and special situations. The findings are categorized into four areas: profitability; fees and expenses; operational challenges; and growth.
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