Hedge funds are changing their standard fee structure – known as the ‘2 and 20’ – due to investor pressure following poor performance and high profile redemptions.
Of the hedge funds tracked by financial information provider Preqin, only 35% still operate the 2-and-20 model, whereby the investor is charged a 2% management fee and a 20% fee on outperformance.
The average management fee over the past year has been 1.57% and the average performance fee was 19.29%, Preqin found. New funds have even lower fees on average – a 1.53% management charge, and a 19.13% performance fee.
The issue of fees has been paramount this year, with almost half of the approximately 500 institutional investors surveyed saying fees were a key issue and 58% saying their interests were not aligned with those of hedge fund firms.
However, management fees had improved in the past year, according to 63% of investors, while 32% said performance fees had seen some improvements. A larger number said there was room for improvement.
Earlier this year, the New York City Employees’ Retirement System decided to cash in all its investments in hedge funds due to poor performance and high fees. The industry seems to be responding but it will take time to move away from the 2-and-20 model, which many well established managers still consider the standard.
©2016 funds europe
