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2013 Business Expense Benchmark Survey
Key Findings
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Pressure to offer founders’ share classes or accept
seed capital to launch with sufficient amounts of
AUM have pressured management fees down from
the industry’s standard benchmark of 2.0%. Our
analysis shows average fees for managers with less
than $1.0 billion AUM ranging from 1.58% to 1.63%.
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Based on this analysis and our survey responses,
we estimate that hedge fund managers need at
least $300 million AUM to break even. Firms
with lower amounts of AUM will not be able to
cover their management company costs without
additional capital or incentive fee payouts. These
management company costs include third party
expenses, salaries for the investment team and
total compensation for investment support and
business management personnel.
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At $500 million AUM, our model shows emerging
firms realizing operating margins of only 69
basis points ($3.4 million). At $900 million AUM,
operating margins increase only marginally to 82
basis points ($7.4 million).
Institutional hedge funds begin to realize better
operating margins as they surpass $1.5 billion
and approach and move beyond the $5.0 billion
AUM threshold. The economics of firms in the $5.0
billion band become more attractive as they realize
appreciable profits as businesses based solely on
management fee collections.
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Average management fees continue well below the
historical 2.0% level, ranging from 1.58% to highs
of only 1.76% for the largest firms in this band.
Management company expenses dip and stabilize,
ranging from 63 to 68 basis points. No appreciable
economies of scale are realized by firms in the
institutional category, as this is a period of ongoing
investment into upgrading the firms’ capabilities
and expanding their teams. During this phase of
growth, headcount grows by ~2.0x for every ~3.0x
increase in AUM.
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Operating margins based solely on management
fee collections average 1.0% for these firms. This
indicates that the ability of these managers to
absorb continued fee pressure is limited without
endangering their ability to keep operations
running smoothly, particularly in an environment of
rising costs.
The economics of running franchise-sized firms with
>$10.0 billion AUM become slightly more profitable,
but this is due to a significant change in the profile of
the product being offered by these firms.
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Franchise firms in our survey population had an
average AUM of $36.4 billion. Only 53% of that
AUMwas focused exclusively on hedge fund product
while regulated alternatives, privately offered long-
only and publicly offered long-only funds made
up a significant share of these firms’ offerings.
This compares to 90% hedge fund product for
emerging managers and 95% for institutional funds
in our survey.
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The shifting product mix worked to lower average
management fee collections more than for both
emerging and institutional hedge funds. According
to our analysis, average management fees for
franchise-sized firms were only 1.53%.
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These firms were able to realize economies of
scale, however, with average management
company costs falling to only 34 basis points. The
skills required to support a mixed product set with
large amounts of regulated and long-only products
were less expensive than for a pure hedge fund
firm. Headcount continued to grow in the previous
pattern after decelerating toward $10.0 billion AUM.
Average compensation for investment support
and business management was 24% lower than for
firms with $10.0 billion AUM. Other services and
expenses were also more commoditized. Overall,
these firms were able to realize $374 of AUM for
every dollar spent on investment support and
business management compared to only $157
to $169 per head for firms in the institutional
AUM bands.
2013 Business Expense Benchmark Survey
Emerging hedge funds struggle to cover high management company expenses based solely on their
management fee collections and do not realize comfortable operating margins at any point below
$1.0 billion assets under management (AUM).