Hedge funds now have new evidence to fight back against those who have long criticized their high fees.
According to a recent analysis by Barclays Plc’s Capital Solutions department, which looked at approximately 290 hedge funds, their fees, and the final payoff, the companies that charge the most—often the biggest names in the industry—tend to deliver stronger returns over time than less expensive competitors.
The most successful investments were made through multi-manager funds, which employ trading pods to invest in many markets. According to the study, firms that charge full pass-through fees—which require consumers to pay for operational costs, portfolio-manager compensation, and other costs—”generated superior net returns.” In addition, they outperformed counterparts that imposed only minimal or no pass-through fees by producing more alpha, or excess returns over benchmarks.
Is the Amount of Hedge Fund Fees Worth the Trade-Off?
The best net returns are frequently produced by multi-manager funds with full fees.
“Established multi-strategy managers, with a strong brand, have the ability to hire the best talent, purchase the most data and invest in infrastructure,” Roark Stahler, head of strategic consultancy for Barclays in the US, said. “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 usually always higher than the so-called 2-and-20 model, which stipulates that businesses should charge investors 2% of invested assets and 20% of profits made. This is due to the fact that compensation for fund managers is the most costly item that is frequently passed through.
According to the report, traditional funds are those that split fees and assets with their consumers. The analysis discovered that among those individuals, those with greater total fees also generated better net returns and alpha than counterparts with lower fees.
Traditional managers who are expensive outperform as well
Funds that don’t use several managers and charge greater fees perform better.
But, according to Stahler, it’s not as straightforward as whoever charges the most.
“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.”
The majority of the biggest managers in the sector demand high fees. Element Capital Management made headlines in 2019 when it increased its performance fee from 25% to 40% of profits. Hedge funds have long under pressure from investors to lower fees, especially as returns declined in the years prior to the epidemic despite a lack of market volatility. Large equities managers with a focus on technology have had difficulty thus far in 2022 during the bear market, although macro managers have achieved some of their greatest gains in years.
Between 2019 and June 2022, Barclays looked at the annualised returns of 250 traditional funds with an average size of $2 billion and around 40 multi-manager funds managing an average of $7 billion in assets.