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2013 Business Expense Benchmark Survey
with the stereotype that many hold of hedge funds
being high fee-generating ventures. Indeed, without
performance and the payout of incentive fees, the
industry is not a highly profitable one until a manager
reaches $5.0 billion and above in AUM. According
to HFR’s Q3 global industry survey, only 6.0% of all
hedge funds fall into this category.
Moreover, these figures illustrate that there is likely to
be a floor to how much fee pressure the industry can
sustain. There is already no appreciable management
company profit being realized by emerging hedge
fund managers, even at $500 million AUM. Any
further decline in fees for these managers would push
the industry break-even out beyond $300 million AUM
and increase the pressure on smaller managers to be
more aggressive in their investments in order to earn
incentive fees to help keep their firm afloat.
Even at higher AUM bands, firms are only netting
1.0% to 1.2% profit on the AUM they are managing.
This leaves hedge funds having only a limited cushion
to absorb rising expenses that have already been
spotted on the horizon. For example, with the onset
of AIFMD, there are likely to be increased regulatory
charges that must be factored into managers’
expense calculations. Higher capital charges and new
regulatory liquidity and leverage ratios are making it
more expensive for hedge funds’ financing partners
to extend their balance sheet, which is likely to result
in rising costs for the fund itself down the road.
Thus, there is a prolonged path along which a hedge
fund must build up its AUM to a sufficiently large
level to become profitable. It is also likely that those
same hedge funds will be hard-pressed to maintain
their margins, as they remain under fee pressure
from their investors at a time when their expense
base is increasing.