Can do better’: allocators mark managers on fund terms

“Better, but still not quite good enough” is the tone of the report card investors have given to hedge funds in the latest survey of allocators by researchers Preqin.

Nearly half of allocators to hedge funds said they have seen investment terms shift in their favour over the past 12 months, and three quarters now believing their own interests are properly aligned with those of managers.

Only 11% of more than 80 fund buyers that Preqin polled worldwide experienced terms moving in favour of the managers.

But the allocators have effectively said ‘must do better’ in regards to all the main terms broached in hedge fund negotiations.

They named the very same terms, most often, as areas of improvement over the past 12 months – namely incentive and fixed fees, lock-ups and greater transparency – as the areas where most room remains for improvement.

Allocators cited fees most often (in 50% of cases) as an area that has got better over the past 12 months, but in between 55% and 58% of instances they also said more work needs doing on fees.

Some 37% said lock-up terms affecting their money had shortened. But equally as often they said more should be done.

And while on 23% of occasions better transparency was mentioned, on 39% of occasions so was ‘further room for improvement’.

Preqin noted the mean hedge fund fees have fallen from the historical standard of 2% (management) and 20% (incentive), to 1.6% and 18.69%. Managed futures funds’ fees are higher, at 1.76% and 20.32%, while Ucits hedge funds charge less, with 1.45% and 16.45%.

Despite investors hoping for even better fee terms from the industry in future, it seems they are sometimes not putting their thoughts into action.

Over half (54%) of allocators have not attempted negotiations with managers for better fees in the past 12 months, while a further 5% tried, but failed. The 46% that have pushed the issue this year is the same proportion as did so in 2011.

Of those that entered into negotiations with managers on fees this year, 89% secured more favourable terms, a significant increase on the 71% success rate in 2011.

Preqin said: “The ongoing departure from the ‘standard’ 2&20 fee structure looks set to continue as more negotiating power shifts towards investors.”

Its research suggested some allocators may be simply walking away from funds with fee structures they do not like. Over half of buyers (55%) said they had rejected funds due to unreasonable fees, compared to 47% of those polled last year that did so. About four in every 10 have rejected funds this year in response to the fee structure.

Preqin said managers’ general responsiveness to negotiating on terms was “crucial to the ongoing revival and growth of the hedge fund industry”, but added that relatively weak returns – of 2.9% this year by August, according to Hedge Fund Research – had led to “further pressure from investors” on managers.

Preqin highlighted transparency and a “stronger alignment of interests” as other key points of discussion between managers and their clients.

The researchers also suggested pensions and insurers were key pressure points for such conversations: “Due to the increasing institutionalization of the asset class, it has been necessary for fund managers hoping to attract capital to match the changing demands of sophisticated and knowledgeable investors.”

Overall, 74% of investors agree or ‘strongly agree’ interests are now aligned.


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