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2013 Business Expense Benchmark Survey
Firms in the emerging and Institutional categories are
primarily focused on offering hedge fund product.
This accounts for 90% of the AUM listed for emerging
firms and 94% for institutional respondents. The
profile of their offering shifts completely, however, as
they reach the franchise stage.
As shown in Chart 4, only 53% of franchise firm assets
are now deemed as belonging solely to the hedge
fund space. There is also a fairly significant set of
long-only offerings being put forward by these funds
in both publicly and privately offered vehicles. There
is also now a noticeable band of AUM being described
as retail alternatives.
These findings mirror those of our 2012 business
expense survey, and tie into the forecasts that we
made earlier in 2013 as part of our Industry Evolution
survey that focused on the Rise of Liquid Alternatives.
One of the reasons that we see many large hedge
funds that surpass the $10.0 billion AUM threshold
begin to consider liquid alternatives and long-only
product is that they are exploring ways to expand their
trading book and diversify their investor base. The
extreme fee differentials between these long-only or
retail products and the traditional hedge fund product
have been narrowing, making it easier for investment
managers to consider moving into lower-fee products.
A large part of this shift has been a gradual reduction
in hedge fund fees.
Another important driver for this diversification into
lower-fee products is borne out in the results of this
survey: The economies of scale realized by franchise
investment management firms has afforded them
a lower cost structure, affording them the ability to
branch out into these less lucrative product lines. One
key outcome of this shift has been a gradual reduction
in hedge fund fees.
Hedge Fund Fees Decline as the Industry
Becomes More Institutional
The majority of hedge fund managers persist in citing
their private fund fees as holding to the “2&20”
regime that marked the industry for most of the
past two decades. The reality, however, is that the
institutionalization of the industry has worked to lower
average management company fees, as illustrated in
Chart 5.
To compile the data in Chart 5, we normalized
fund records across the HFR and the Hedge Fund
Intelligence (HFI) dataset, coming up with 6,281
individual funds that also listed their management fee
totals. We then divided those funds up by AUM and
determined those bands most closely aligned with
the 6 standard AUM targets highlighted within this
paper. For example, we looked at 5,195 funds that
had AUM between $1 and $350 million and calculated
the average management fee charged by this group
Chart 5: Average Management Fees by Fund Size
SIZE OF ORGANIZATION
SMALL
Source: Citi Prime Finance analysis based on firms reporting across the HFR & HFI dataset
EMERGING
INSTITUTIONAL
FRANCHISE
0
1.00%
1.10%
1.20%
1.30%
1.40%
1.50%
1.60%
MANAGEMENT FEES
1.70%
1.80%
$1-$350M
5,195 Funds
$751M-$3.5B
473 Funds
$351-$750M
491 Funds
$3.51-$7.5B
79 Funds
>$12.0B
18 Funds
$7.51-$12.0B
25 Funds
1.58%
1.63%
1.60%
1.58%
1.76%
1.53%
$100M
$500M
$1.5B
$5B
$10B
>$10B