Latest research from Fitzrovia, a Lipper company, highlights significant variations in the way hedge funds� performance fees are structured.
The research highlights the importance of assessing hedge fund fees beyond simply referring to the much used “2 and 20” * � both for their impact on returns and on fund company revenues. For example, around one third of alternative investment funds in the research charge a performance fee at a level other than 20% of net gains.
18% of alternative investment funds in the research have a hurdle rate in place, whereby a performance fee will only be achieved once the manager has exceeded a risk-free rate (�hurdle�) of return.
The research also reveals that 87% of alternative investment funds in the research use a High Water Mark. This aims to avoid volatility being unfairly rewarded by ensuring that shareholders do not pay performance fees on a recovery of performance to a previous high.
At the same time, only 2% of alternative investment funds with a High Water Mark reset it after a defined period of time, while the vast majority choose to make it ‘permanent’. In Fitzrovia�s view, it could be to the benefit of both managers and investors if this mark was reset after a period of one to three years.
Use of this latest research should help hedge funds to take a more pro-active approach to their fiduciary responsibilities and to address criticisms of their fee structures, sometimes referred to as �heads I win, tails you lose� (for example, in a footnote in the SEC Staff report, �Implications of the Growth of Hedge Funds�).
Fitzrovia�s report �Benchmarking Performance Fees� analyses the performance fee structures of 2,422 funds, of which 393 are alternative investment funds.
