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As of September 2012, the average hedge fund charged 1.6 percent annually in management fees and collected 18.7 percent of any gains, according to data provider Preqin.

It seems like 2-and-20 is no longer the norm, as we see a pretty clear downward trend, espeically in management fees. And things are not looking so hot for 2013 either. 2012 was a pretty bad year for hedge funds. HFRX global index shows 3.25% YTD return as of December 27, compared to 13% for MSCI global index. Surely investors don't want to pay more... for less, so I think on average, fees will continue to decline in the near term.

Here's an article that attempts to explain the "new normal" in hedge funds and the underperformance:

The reality is that the hedge fund industry has morphed into a stodgy group of investors putting up plodding, conservative returns. This is partly because of the growing personal wealth tied up in the funds among the partners. They are more concerned about preserving their own capital than taking outsized bets.

It goes on to predict more fee-cutting in the future.

Besides declining fee, what's the future trend for hedge fund fees? A bifurcation maybe?

  • Traditional asset management route: keeping management fee, but shrinking performance fee.
  • Old Buffet fee structure: no management fee, but high performance fee above a threshold.

What do you think? Is 2-and-20 a thing of the past?

Happy new year btw!

Comments (14)

  • mrb87's picture

    In short, it will a thing of the past for all but the best funds. Investors will still pay an extra 50-100bps in management fees for an extra 5-10% in performance - but most funds aren't delivering.

    It's not the performance fees that are the issue but the management fees and the capital aggregation it encourages.

  • CashCow's picture

    Yes, 2 and 20 is far from the norm now, though it differs depending on the strategy. Some good quant funds can still charge 2 and 20 or higher for strategies where a limited amount of capital can be put to work. A couple of the most successful multi-strat funds can also still change high fees. But the vast majority of fundamental equity l/s and distressed funds are closer to 1.5 and 15 for large investors (individuals investing a couple million often pay a higher rate closer to 2 and 20).

  • DontMakeMeShortYou's picture

    This is deceptive because there are countless funds with tiny AUM that are going to drag down #s. If there were AUM-adjusted figures to look at, it'd be much closer to 2/20.

  • In reply to DontMakeMeShortYou
    gammaovertheta's picture

    DontMakeMeShortYou:
    This is deceptive because there are countless funds with tiny AUM that are going to drag down #s. If there were AUM-adjusted figures to look at, it'd be much closer to 2/20.

    nice observation. that's an important distinction

  • koske's picture

    Good topic.

    My opinion, as some of the other guys have mentioned above me, 2/20 can't be a firm number in the years to come.

    I predict that it will be rang pound performance compensation. Management fee will still be in place of 100-200bp, but the performance will look something like:

    Return:10%+ YTD
    Fee: 15%

    Return: 9.99%-8% YTD
    Fee: 12%

    etc etc..

    I think the industry needs to adapt and be more flexible and show there investors that in this environment of poor HF performance that they have a larger vested interest in 'beating the market'. They can do that by having these flex fee schemes.

    Personally as an investor I would be pissed if the fund I was invested in made 5% and then charged me 2/20 on top of that.

    I know a lot HF implement watermarks and hurdle rates on PM's to protect the investor, but I think a new fee structure needs to be implemented, that takes into consideration losses as well.

    Just my $0.02.

    - Only time will tell....

  • HFFBALLfan123's picture

    Please for the love of god, if you are still in college and speculating just to engage in the topic, stop because you dilute the discussion.

    I think the norm, in RE at least, seems to be 1.5% IM fee and possibly a fee break for very large committments. Promotes on the other hand, seem to be all over the place but the norm is 15% all with very unique and creative catch-ups/step-ups.

    Obviously this all depends on the manager's track record, vintage of the fund etc..

  • In reply to DontMakeMeShortYou
    glide9811's picture

    DontMakeMeShortYou:
    This is deceptive because there are countless funds with tiny AUM that are going to drag down #s. If there were AUM-adjusted figures to look at, it'd be much closer to 2/20.

    This is very true. I worked for a tiny shop with 75M in AUM and they charged 1/15 but with a 3 year lock-in period. And this was an extremely successful fund averaging 15% returns a year for 20 years. I know people aren't going to believe that a fund can perform so well and still be so small, but it happens.

  • In reply to glide9811
    HFFBALLfan123's picture

    glide9811:
    DontMakeMeShortYou:
    This is deceptive because there are countless funds with tiny AUM that are going to drag down #s. If there were AUM-adjusted figures to look at, it'd be much closer to 2/20.

    This is very true. I worked for a tiny shop with 75M in AUM and they charged 1/15 but with a 3 year lock-in period. And this was an extremely successful fund averaging 15% returns a year for 20 years. I know people aren't going to believe that a fund can perform so well and still be so small, but it happens.

    How did they retain talent with 1.125mm in management fees?

  • In reply to HFFBALLfan123
    glide9811's picture

    HFFBALLfan123:
    glide9811:
    DontMakeMeShortYou:
    This is deceptive because there are countless funds with tiny AUM that are going to drag down #s. If there were AUM-adjusted figures to look at, it'd be much closer to 2/20.

    This is very true. I worked for a tiny shop with 75M in AUM and they charged 1/15 but with a 3 year lock-in period. And this was an extremely successful fund averaging 15% returns a year for 20 years. I know people aren't going to believe that a fund can perform so well and still be so small, but it happens.

    How did they retain talent with 1.125mm in management fees?

    It was a lean shop to say the least. It consisted of one back office employee, two analysts, and the PM himself. And management fees were higher than 1.125M. All in, the fund pulled in around 2.5M a year in fees. The pay was also structured much differently than you might expect because the PM was also the largest investor, so he would make the majority of his money from his investments rather than from management fees. He compensated the analysts accordingly to maximize his total income (as an investor and as a PM).

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  • streetwannabe's picture

    "History doesn't repeat itself, but it does rhyme."

  • BlackHat's picture

    I hate victims who respect their executioners