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Hedge fund profits drop 30% in 2014, bonus pool shrinks

[LONDON] The hedge fund industry's profits fell by 30 per cent to US$21.9 billion in 2014 from US$31.2 billion a year ago as poor returns led to lower performance fees, Citigroup said in a report on Thursday.

The drop means a significantly reduced bonus pool of US$9.2 billion for the fund managers and analysts running the nearly US$3 trillion industry in 2014, as compared with US$23.1 billion in 2013, and an increased pressure on smaller hedge fund firms as they rely more on a fixed management fee for survival.

"With AUM (assets under management) at record highs, profits from management fee revenues now account for a larger share of total profits," said Sandy Kaul, global head of business advisory services at the Wall Street bank.

The findings, based on a survey of nearly 150 hedge fund firms collectively managing US$581 billion, showed that a fund needs at least US$310 million to break even.

The hedge fund industry is important for the asset management industry's ecosystem as even though hedge funds manage only 4 per cent of the industry's AUM, they account for about a third of its profitability, according to the report.

Hedge funds, as measured by industry tracker Eurekahedge, gained 4.4 per cent in 2014, half the returns of a year ago.