Hedge fund fees fall to lowest level since 2008 financial crisis, says research firm

HEDGE fund fees have dropped to their lowest level since the global financial crisis in 2008, as high inflation and fears of a recession hit investors, said Hedge Fund Research (HFR) on Friday (Jan 6).

The research firm said that from the second to third quarter of 2022, hedge fund base fees fell by one basis point (bps) to an estimated 1.35 per cent. It added that average incentive fees tumbled 4 bps to 16.01 per cent.

The figures represented both fees’ lowest levels since the firm began publishing the estimates in 2008.

Last year was a challenging one for some classes of hedge funds, particularly long-only stock investing firms battered by declines on Wall Street. The three main indexes booked their first yearly drop since 2018 as surging inflation and recessionary risks dented investments in equities.

The HFRI 500 Fund Weighted Composite Index, which tracks many of the biggest global hedge fund performances, posted a year-to-date decline of 2.78 per cent in November. Meanwhile, a larger index tracking the total industry was down by 3.87 per cent year to date at the end of the same month.

Hedge fund managers are traditionally known for their two-and-20 fees: a lower constant percentage is applied to the amount of assets managed in the hedge fund, and a higher incentive fee is applied as part of profit-sharing when performance numbers rise.

Bruno Schneller, a managing director at Invico Asset Management, said: “Fees are still too high, especially in relation to the meagre result, which unfortunately has been going on for too long.” 

He added that fee structures vary significantly, depending on the fund.

HFR said that larger hedge funds did better in the third quarter of 2022. The top hedge funds in its weighted composite index had a positive 10.9 per cent return, while the bottom decile averaged a negative 14.3 per cent.

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David Bizer, managing director of investment firm Global Customised Wealth, said: “The hedge funds that attract the most capital and charge the highest fees are usually the managers with a long, successful track record. Many of the best funds are closed to new capital in order to preserve their ability to generate attractive returns.”

He cautioned that hedge funds that were easy to get into might not be the best ones to invest in.

The number of new hedge funds launched in 2022 fell to 71 in the third quarter of the year, said HFR. This was nine fewer than in the previous quarter, and the lowest figure since the fourth quarter of 2008. REUTERS