Report: Hedge Funds With Highest Performance Fees Produce Best Returns

Aug 30 2013 | 10:14am ET

It turns out that with hedge funds, as with much else in life, you get what you pay for.

A new study from Preqin finds that hedge funds charging more than the industry-standard 20% for performance have been the best performers over the past six years. Such funds have the highest net-returns on both three- and five-year annualized basis and have posted the best risk-adjusted returns.

Such evidence, however, doesn't appear to be swaying investors.

Preqin's survey shows that fees remain the biggest concern for institutional investors, and that, in spite of the correlation with higher returns, hedge funds are responding, with 68% of investors seeing an improvement in management fees and 58% in performance fees. Preqin's head of hedge fund products, Amy Bensted, cited a "competitive fundraising environment" to explain hedge funds' willingness to compromise.

Investors are willing to compromise, too, especially on the issue of performance fees.

"The funds with the highest fees have also been shown to offer other concessions to investor demands—for instance, by showing greater use of hurdle rates, which must be met before performance incentives are charged," Bensted said.

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