Basic HTML Version
11
|
2013 Business Expense Benchmark Survey
In order to create a consistent basis for comparison,
we have adjusted our actual survey results to provide
standard measures for firms at regular AUM intervals.
We opted to look at results for firms with the following
levels of AUM: $100 million, $500 million, $1.5 billion,
$5.0 billion and $10.0 billion. For firms that exceeded
the $10.0 billion level, we opted to take the average
of their actual AUM in our dataset, which equated to
$36.4 billion.
The first significant finding highlighted in Chart 3 is
that firms with $100 million AUM had an extremely
high cost basis, with management company expenses
of 244 basis points. This broke down as follows:
salaries for investment personnel (excluding incentive
pay) equated to 67 basis points; total compensation
(salary and incentive pay) for investment support and
business management personnel was 85 basis points
and third party expenses charged to the management
company equated to 92 basis points.
This figure dropped dramatically as firms grew their
AUM to the $500 million threshold, but the total
management company expense across the three
categories listed above still amounted to 94 basis
points, broken out as follows: 37 basis points toward
investment personnel salaries; 29 basis points for
other compensation and 28 basis points related to
third party expense.
High management company expenses are
characteristic of emerging funds. Averaged between
the two AUM bands, management fees equated to 169
basis points. Registration requirements, compliance
expectations, operational standards and the
necessity of having a professional administrator have
all increased the financial burden that smaller hedge
fund firms must support on a limited asset base, thus
leading to high basis point charges.
There is a significant contrast to what happens as
firms cross into the institutional category. Higher
levels of AUM allow for rising expenses to take up a
smaller share of assets. Basis point charges come
down, but they also level off. There is only a 5 basis
point difference between the costs realized by firms
at $1.5 billion, $5.0 billion and $10.0 billion AUM levels.
Management company expenses for these firms range
between 63 and 68 basis points, with an average of
66 basis points across the three size categories, a
figure 61% below the average for emerging firms.
The stability of these expenses is a key characteristic
of the institutional phase. While AUM grows for these
firms, their ability to realize economies of scale is
limited, as they are constantly being challenged to
improve their platform.
It is not until firms pass the $10.0 billion threshold
that we begin to see their cost structure decline.
The waves of investment that marked these firms’
institutional growth phase begin to be monetized
as the organizations are able to leverage their
platforms to attract increased assets. As this growth
occurs, these firms build up name recognition, which
in turn attracts investment talent and allows the
organizations to consider new products. It is this
characteristic that causes us to put these firms into
the “Franchise” category.
As shown in Chart 3, the average management
company expense for these firms is only 34 basis
points. This marks a 49% drop from the average for
the Institutional category. The mix of products offered
by these Franchise firms also differs dramatically
from their smaller hedge fund counterparts. This is
illustrated in Chart 4.
Chart 4: Product Mix
24%
%
20%
30%
40%
50%
60%
70%
80%
90%
100%
10%
26%
38%
Privately Offered Long-Only
Retail Alternatives
PE & Other
Publicly Offered Long-Only
40%
59%
44%
EMERGING
INSTITUTIONAL
FRANCHISE
PERCENT OF TOTAL AUM
Hedge Fund AUM
Percent of Hedge Funds
90%
94%
53%