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 鈥�2 and 20鈥� model of investment manager compensation鈥�2 percent management fee and 20 percent of the profits鈥攈as 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: 鈥淔ee 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.鈥�
鈥淎nd while it鈥檚 clear that there is little room for additional downward pressure on management fees, at current average fee levels, investor-manager interests are well aligned鈥攂oth parties are focused on performance.鈥�
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 鈥�2 and 20鈥� model of investment manager compensation鈥�2 percent management fee and 20 percent of the profits鈥攈as 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: 鈥淔ee 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.鈥�
鈥淎nd while it鈥檚 clear that there is little room for additional downward pressure on management fees, at current average fee levels, investor-manager interests are well aligned鈥攂oth parties are focused on performance.鈥�
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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