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2013 Business Expense Benchmark Survey
to determine a “standard” management company
fee for a $100 million AUM fund. We looked at 491
funds with between $351 and $750 million of AUM to
determine a standard management company fee for
funds at the $500 million AUM band. The AUM bands,
and the number of funds considered at each interval,
are illustrated on the x-axis of Chart 5.
The first finding that jumps out is that while individual
funds may still be getting a 2.0% management fee,
the industry is realizing average fees below that
level, with fees in our analysis ranging from 1.53% to
1.76%. There are several factors driving this trend.
Small hedge funds are looking to attract capital
and are often incenting investors to allocate money
to them by offering founders’ share classes. These
share classes typically offer steeply discounted
management fees for the first wave of investors into
the fund. Most founders’ share classes expire after
either a limited window of time or when the fund hits
a certain AUM target. Those investors that buy in
to the founders’ share class may also be offered an
opportunity to increase their allocation at a later time
at preferential terms. These discounts can lower the
average overall fee collected by the fund.
Large institutional investors in many instances are also
able to negotiate with hedge fund managers to receive
lower fees, even after the founders’ share class has
closed. Many funds now have additional share classes
that offer management fees below the 2.0% standard
for those investors able to write tickets of a certain size.
Other firms that decide to allow one institutional
investor to allocate money at a lower management
fee may, because of their “most favored nation”
documentation, be forced to offer similar fees to their
other investors in the fund.
With assets in the industry having become
predominantly institutional, all three of these factors
are working to slowly lower the average management
fees across the board.
As Chart 5 shows, the lowest management fees being
collected in the industry are actually being registered
by the largest funds. Funds with greater than $12.0
billion AUM are only taking in an average management
fee of 1.53% on their hedge fund product. With many
privately offered long-only funds commanding a 1.0%
management fee and publicly offered long-only and
retail alternative funds commanding anywhere from
0.60% to 1.50%, the management fee differential
between hedge funds and other products is no longer
as significant as it was in the past.
Operating Margins Show Industry’s
Prolonged Path to Profitability
Armed with an average management fee for each
of our size bands, and knowing total expenses being
carried by the management company, we are able to
calculate operating margins. These operating margins
are for the management company only. They exclude
any fund-level charges that are being passed through
to the investor, and they also exclude any capital being
Chart 6: Operating Margins Based on Average Management Company Fees & Expenses
SIZE OF ORGANIZATION
SMALL
Source: Citi Prime Finance. *Average AUM for firms with >$10.0 billion AUM equals $36.4 billion. Total dataset examined (124 firms, $465 billion AUM)
Average:
9 bps
-1.30%
-.80%
-.30%
.20%
.70%
1.20%
BASIS POINTS
$100M
$500M
$1.5B
$5B
$10B
>$10B
EMERGING
INSTITUTIONAL
FRANCHISE
Average:
99 bps
Average:
119 bps
Break-even
$300M