Study: U.S. Hedge Funds Adopting Tiered Fee Structures

Mar 11 2015 | 2:43pm ET

A growing number of new hedge funds offered by new U.S.-based managers implemented management fee structures that decrease as fund assets grow, according to The Seward & Kissel New Hedge Fund Study.

Several findings within the study signaled hedge fund managers’ heightened sensitivity to the needs of investors, and the related imperative to reign in costs. Of all funds studied, 19% adopted a tiered approach to management fees, stepping down to lower rates as assets in the fund surpass pre-established benchmarks. (Seward & Kissel estimates this figure was less than 10% in 2013.) The tiered management fee structure recognizes and accounts for the efficiencies that can be gained with scale.

“This much is clear from the 2014 Study: it’s more important than ever for managers to run a tight ship. The increased adoption of trickle-down management fees tells us that managers are listening to an investor attitude that as you get larger, you should be sharing your economies of scale with your clients,” said Steve Nadel, a partner at law firm Seward & Kissel and author of the study. “The greater percentage of equity-based funds may reflect the fact that equity strategies outperformed many other investment strategies in 2014.”

All of the funds employing the tiered management fee structure had equity-related strategies, raising the question of whether the trend will spill over into funds with non-equity strategies in future years. In addition, the percentage of all funds using equity strategies increased to 73% in 2014, up from 65% in 2013.

Improved operational efficiencies among hedge funds that employ non-equity-based strategies likely contributed to another finding: the virtual elimination in any disparity between the management fees charged by equity- and non-equity-based funds. The average management fee rate charged by non-equity-based funds decreased 12 basis points in 2014, with the rate across all funds converging at 1.7%.

Other figures from the study suggest that in 2014, managers were very focused on raising day one capital and, consequently, offered founders class fee discounts a high percentage of the time. The percentage of all funds that obtained some form of founders capital increased sharply, from 43% in 2013 to 65% in 2014, with 75% of equity funds and only 43% of non-equity funds offering such classes.

The study also showed that that within the entire hedge fund industry for the calendar year 2014, at least 40% of all launches greater than $75 million (and an estimated 15% of all fund launches) had some form of seed capital.

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