AIMA: Emerging Trends Suggest Greater Alignment of Interests Between Investors, Managers

Sep 13 2016 | 9:27pm ET

Alternative asset managers are changing business models and exploring ways to improve the alignment of interests between themselves and their investors, according to a new survey by the Alternative Investment Management Association (AIMA). 

The study, titled “In Concert, found that the growing emergence of beneficial terms, such as “claw backs”, whereby a share of past performance fees are returned to investors during loss-making periods, or the co-investment of manager’s own personal capital as skin in the game, can be obtained by investors in return for agreeing to lock up their capital for longer.

The study is the most extensive undertaken by AIMA into the design of manager remuneration, investment terms and other methods of deepening the relationship with investors, the association said in a statement. 

Among the findings:

  • One-in-three managers now charge performance fees above a hurdle rate, such as a fixed percentage or an index-based benchmark
  • Three-quarters (77%) of managers offer or are considering offering a sliding fee scale, whereby management fees are reduced as the fund raises assets above particular thresholds
  • Almost all (97%) managers charge performance fees only above a high watermark – the fund’s highest previous value
  • Although not widespread, more fund managers are offering claw backs, whereby a share of past performance fees are returned to investors during loss-making periods
  • Longer lock-ups in exchange for lower fees and other beneficial terms are increasingly common
  • The majority of managers now agree to calculate and charge performance fees annually, rather than throughout the year, such as when profitable positions are closed out
  • In firms where staff invest their own capital in the fund, nearly 30% said that principals and employees were the source of more than 10% of the fund’s total assets under management
  • Nearly two-thirds (61%) of managers consider that having a significant personal investment in the fund is the single most important method for aligning interest with their investors
  • Around half of managers (48%) offer or are considering offering co-investment to their investors, via either a particular investment opportunity or jointly-managed fund
  • Disclosure of data has increased substantially since the financial crisis, and investors are given greater access to portfolio managers.

“Hedge funds and other categories of alternative investment funds have, for decades, offered close alignment of interest with their investors,” said AIMA CEO Jack Inglis in the statement. “Performance fees charged only above a high watermark and ‘skin-in-the-game’ are decades-old concepts and have helped hedge funds in particular to raise capital from institutional investors. 

“But what our survey shows is that managers now have a much larger array of tools at their disposal and are able to create ever closer and more tailored alignment. This trend helps to explain why, with only isolated exceptions, pensions and other investors have remained loyal to hedge funds in recent years.”

The survey of has been sponsored by RSM, a provider of audit, tax and consulting services focused on the middle market.“Institutional investor demands have brought about significant changes that affect the overall industry,” said Alan Alzfan, hedge fund practice leader with RSM US LLP (“RSM”). “In a highly competitive environment for the asset management industry, this survey provides keen insight on how hedge fund managers continue to take the lead in finding solutions that drive growth and innovation and add value to their investors.”

The survey was comprised of 120 alternative investment fund management firms representing an aggregate $500 billion in AUM. It was sponsored by audit and tax services provider RSM and was overseen by AIMA’s Research Committee, which is made up of executives at fund managers and service providers, and was reviewed by the AIMA Investor Steering Committee, made up of pension fund managers, endowments, foundations, large family offices and sovereign wealth funds.

AIMA is a global alternative investment industry association with 1,600+ corporate members in more than 50 countries. It is the co-founder of the well-known Chartered Alternative Investment Manager designation, and its manager 

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