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2013 Business Expense Benchmark Survey
The hedge fund industry moves through distinct
phases in terms of its cost basis. Emerging hedge
funds below $1.0 billion AUM have extremely high
costs and realize limited amounts of operating
margin, even after they surpass the $300 million
break-even point. Institutional hedge funds with $1.0
billion to $10.0 billion AUM have a lower business
expense load, but show no real economies of scale as
their assets increase. These firms average ~60 basis
points of expense and clear ~1.0% operating margins,
even as their AUM increases. Franchise-sized firms
with >$10.0 billion AUM have a significantly broader
product mix, with more regulated alternative and
long-only money. Their cost basis is lower, nearly half
of that for firms in the institutional category. Thus,
even with lower average management fee collections,
they nonetheless show nearly a 20% expansion in
their operating margins.
As the hedge fund industry matures, the $10.0 billion
AUM threshold is becoming an increasingly important
transition point. There is a steady increase in the
average amount of AUM per investment management
head as firms grow from $100 million AUM and
surpass the institutional threshold, but the pace at
which that AUM/head expands slows appreciably as
firms move from $5.0 billion to $10.0 billion AUM.
To resume growth, firms at the $10.0 billion AUM
level show a spike in the ratio of investment support
to investment management personnel. This spike
reflects an expansion in the capabilities of the fund
that allows for the change in product mix that occurs
as firms surpass the $10.0 billion AUM mark. By the
time funds reach our average >$10.0 billion AUM of
$36.4 billion, the previous pattern of about a $40
million to $50 million increase in AUM per investment
management head resumes.
Conclusion
Throughout this report, we have explored the economics and overall business expense of running a
hedge fund organization. There were several key themes that came through in the analysis.