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2013 Business Expense Benchmark Survey
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Operating margins based solely on management
fee collections were slightly above institutional
managers’ 1.0% level, rising to 1.2%. This illustrates
that adding lower fee products actually helps to
expand operating margins—a thesis that has been
under much debate since interest in regulated
alternative funds began to surge during the past
12 months.
Several important regional differences were shown
in the data. The majority of European hedge funds
responding to the survey had higher management
company expenses than similarly sized U.S.
hedge funds.
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In 4 out of the 6 examined AUM bands, European
management company expenses were at least 20%
higher than U.S. costs.
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Marketing was the single largest category of
expense variance between the U.S. and Europe.
For smaller hedge funds with $100 million to
$500 million AUM, European marketing expenses
were 150% to 200% higher than in the U.S., due
mostly to compensation differentials. In addition,
European funds hired more senior marketing
personnel early in their development cycle. This
compensation difference evaporated by $5.0 billion
AUM as U.S. firms also brought on more senior
marketing resources.
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At the upper AUM bands, marketing differentials
were higher in Europe because of a larger number
of heads devoted to this function. European funds
with $5.0 billion AUM had an average of 7.33 heads
assigned to marketing versus 6.04 heads in the U.S.
At $10.0 billion AUM, the difference was even more
pronounced, with European firms registering 20.5
heads versus only 6.6 heads in the U.S.
Asian hedge funds showed the opposite pattern.
Survey respondents from Asia were confined to the
lower AUM bands in our analysis, $100 million, $500
million and $1.5 billion AUM. At each of these levels,
average management company expenses were lower
than in both the U.S. and Europe.
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$100 million AUM Asian-Pacific (APAC) hedge funds
had average management company expenses 20%
lower than the mean costs noted in the U.S. and
Europe for similarly sized firms. This differential
expanded at $500 million AUM, with APAC funds
registering expenses 42% below the mean and
staying heavily discounted at 39% under the mean
for firms at $1.5 billion AUM.
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From a headcount perspective, APAC hedge funds
were nearly on par with European hedge funds, but
the total basis points being spent on compensation
were significantly lower—by 38% for $100 million
AUM funds, by 54% for $500 million AUM funds
and by 32% for $1.5 billion AUM funds. Third party
expenses for the management company were also
significantly lower by a differential of 27 basis points,
13 basis points and 10 basis points respectively.
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Headcount differentials were mixed relative to the
U.S., with APAC having fewer heads at the $100
million AUM level (9.3 versus 12.0), but more heads
at both the $500 million (18.5 versus 15.8) and $1.5
billion AUM levels (42.7 versus 32.8). Compensation
expenses in APAC were lower at each of these
bands by 42%, 38% and 36% respectively. Third
party expenses showed a mixed picture—higher for
$100 million AUM firms (96 versus. 69 basis points),
but nearly the same for $500 million (22 versus 25
basis points) and $1.5 billion AUM firms (11 versus 13
basis points).
In addition to management company expenses, this
year’s survey was also able to delve more deeply into
fund level charge backs.
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Firms with $100 million AUM charged the fund an
average of 46 basis points of expense. This figure
dropped sharply as firms surpassed break-even at
$300 million AUM.
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At $500 million AUM, firms charged back 15 basis
points of expense to the fund level, and the amount
being charged back remained steady (between
14 and 17 basis points) as AUM continued to grow to
$10.0 billion.
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It is only after firms surpassed the $10 billion
AUM threshold that we saw another appreciable
shift. Survey participants that had >$10.0
billion AUM on average charged back only
6 basis points of expense to the fund.
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Charges related to operations were the single
largest expense assessed to the fund level across
all AUM bands, accounting for at least 63% and up
to as much as 71% of the amount being charged
back. Charges associated with fund administration
were the largest single category of expense within
operations, ranging from 37% to 59% of total
operational charge-backs.