Nearly Half of Hedge Funds Considering Fee Cuts Amid Stagnant Performance

The hedge fund industry is facing increased pressure to adapt its fee structures, with close to half of all hedge funds now contemplating reductions in their charges. This shift comes in light of several years characterised by less than stellar investment returns and a noticeable decline in client inflows.

A recent survey conducted by IG Prime, which caters to the hedge fund sector, revealed that 44 per cent of over 100 hedge funds polled are considering changes to their fee arrangements. Historically, many hedge funds have adhered to the traditional “2 and 20” model, which entails management fees of 2 per cent along with performance fees of 20 per cent on profits.

The survey highlighted that 64 per cent of those considering alterations to their fee structure cite competition as a driving factor. Additionally, 42 per cent noted regulatory pressures, while 16 per cent indicated that client demands are also influencing their decisions.

Chris Beauchamp, chief market analyst at IG Prime, remarked on the shifting landscape within the hedge fund industry. He noted that a widespread perception of lacklustre returns has led asset allocators to adopt a more stringent approach during fee negotiations.

Hedge funds offer a myriad of investment strategies, often marketing themselves on the premise of delivering returns that are uncorrelated with traditional asset classes such as equities and bonds. In times of financial unpredictability, such attributes are particularly appealing, although many funds may not perform as anticipated.

Amid these challenges, hedge funds are experiencing mounting cost pressures. Compliance costs have emerged as the fastest-rising expense, with technology costs following closely behind as indicated by 43 per cent and 42 per cent of respondents respectively.