Hedge funds that charge most tend to perform best, says Barclays study

HEDGE funds have fresh ammunition to push back against detractors who have long criticized their hefty fees.

The firms that charge the most – often the industry’s biggest names – tend to produce better returns over time than less expensive competitors, according to a recent study by Barclays Plc’s Capital Solutions group, which examined about 290 hedge funds, their fees and the ultimate payoff.

Multi-manager funds, which use pods of traders to invest across markets, were among the best performers. Those that charge full pass-through fees – meaning clients pay for the cost of operations, portfolio-manager compensation and other expenses – “generated superior net returns,” according to the study. They also produced more alpha, or excess returns over benchmarks, than peers who charge only partial pass-throughs or none at all.

“Established multi-strategy managers, with a strong brand, have the ability to hire the best talent, purchase the most data and invest in infrastructure,” said Roark Stahler, US head of strategic consulting at Barclays. “Those costs are passed on to the investor, which benefits the firm, but also shows investors should be OK paying that because they’re still getting better returns even after those fees.”

Such pass-through fees are almost always greater than the so-called 2-and-20 model, in which firms charge investors 2 per cent of assets invested and 2 per cent of profits generated. That’s because the most expensive item that’s often passed along is portfolio-manager compensation.

The study defined traditional funds as those that charge clients a portion of fees and assets. Within that group, those with higher combined fees also produced stronger net returns and alpha than peers with lower fees, the report found. Still, it’s not as simple as whoever charges the most, Stahler said. “High fees do not lead to higher returns, but higher returns can lead to higher fees,” he said. “If you don’t have the performance and the consistency, you’re not going to be able to charge higher fees without seeing redemptions.”

SEE ALSO

Can hedge funds add value in today’s treacherous macro environment?

Asean Intelligence

Get insights into businesses across South-east Asia

Get the free report

Many of the industry’s biggest managers charge substantial fees. In 2019, Element Capital Management famously boosted its performance fee to 40 per cent of profits, up from 25 per cent. Investors have long pushed hedge funds to cut fees, particularly as returns waned in the pre-pandemic era amid a dearth of market volatility. So far in 2022, large tech-focused equity managers have struggled during the bear market, while macro managers produced some of their strongest gains in years. Barclays examined annualized returns between 2019 and June 2022 of about 40 multi-manager funds overseeing an average of US$7 billion of assets, and 250 traditional funds with an average of US$2 billion. BLOOMBERG