Management Fees: Traditional Vs. Bespoke — Evening Brief – 10.02.24
Hedge fund managers that employ traditional approaches to investing are charging management fees that are approximately double those of firms that employ customized strategies, according to a new study by Seward & Kissel.
The law firm’s second annual Established Manager Hedge Fund Study, which examined funds operational for five years or more and managed over $1 billion in assets, revealed that one-quarter of typical methods do not impose an incentive allocation.
Management fees, a historically contentious issue in hedge fund manager-investor relationships, differ significantly between traditional and bespoke methods.
Managers employing traditional tactics impose an average fee of 1.8% in their standard class, but those utilizing bespoke strategies charge a significantly lower average management fee of approximately 0.9%. In contrast, the funds examined in the 2023 New Manager Hedge Fund Study had a significantly reduced management fee rate for their standard class, averaging approximately 1.48% for equity strategies and 1.4% for non-equity strategies.
“This represents a significant discount to the management fees charged by established managers in their traditional strategy fund standard classes, which we believe may be partly attributable to the greater bargaining power possessed by established managers and the significantly higher overhead costs often borne by them,” the report stated.
About one-quarter of the traditional strategy funds did not charge an incentive allocation — “an unexpected development,” according to Seward & Kissel.
Among the remaining 75% of managers that implemented an incentive allocation, the average rate was almost 22%. The analysis indicated that one in five conventional strategy funds had a hurdle rate. “By comparison, the average standard class incentive allocation rate in the 2023 New Manager Hedge Fund Study was somewhat lower at 18%, with a significant 40% of such funds structuring incentive allocations with a hurdle rate,” the report added.
The work examined the varying methodologies employed by managers utilizing conventional strategies—such as long/short, macro, and credit—and customized strategies, including income funds, defensive funds, and inflection funds.
The study indicated that traditional strategies in the established hedge fund community are predominantly characterized by equity-focused funds, which constitute approximately 50% of total funds. Among the remaining managers, approximately 25% employed a macro approach, while the other 25% focused on credit investments.
In contrast, conventional techniques are predominantly equity-focused, with 74% of funds employing an equity or equity-related approach. The remaining 26% were allocated among various multi-strategy, quantitative, global macro, credit, cryptocurrency, and commodity-related strategies.