Formerly a symbol of prestige, high-fee hedge funds are contending with low-cost competition
Once upon a time, hedge funds enjoyed significant demand and therefore could name their price; most charged a flat rate of 2% on assets managed and 20% on profits earned. Now, about 20 years later, they are starting to compete on costs.
Statistics from hedge fund database provider Eurekahedge showed that a decade ago, hedge funds charged an average annual management fee of 1.68% of a client’s assets, according to the Globe and Mail. In 2015, it was at 1.44%, and last year it went down to 1.39%. At the higher end of the fee spectrum, US-based hedge fund Tudor Investment cut its fees to 2.25% on assets and 25% on profits, down from 2.75% and 27%, respectively.
Adam Patti, CEO at New York-based alternative-asset ETF provider IndexIQ, didn’t find it surprising; assets managed by hedge funds contracted by US$21.8 billion last year, which has not happened since 2008. Aside from that, their historical performance of 3%-6% over the risk-free rate no longer seems lucrative as the risk-free rate is almost at zero.
The industry is also experiencing fallout from the mutual-fund fee wars. “We’re finally starting to see competition in the fee area with mutual funds,” said Eric Kirzsner, a finance professor at Rotman School of Management. “The same thing is happening in the hedge fund industry.”
High-net-worth investors have started to bargain hard, aiming for access to hedge-fund level strategies at lower price points. This is possible through certain mutual funds. For instance, Vancouver-based Nicola Wealth has included hedge-fund exposure in some of its mutual funds, such as the 5% allocation it allows for its balanced portfolio. Some of the strategies are managed internally, but others are done by hedge fund companies such as California-based Altegris and Toronto’s Polar Asset Management Partners.
According to Nicola Wealth Alternative Strategies Manager Ben Jang, the firm has to pay 2% on assets and 20% on profits to some of the hedge fund managers it works with — a cost worth bearing for some hard-to-replicate strategies. Nicola’s investors aren’t on the hook for such fees, however; they just have to pay the firm between 0.5% and 1.25% on their assets.
Certain ETFs that track hedge fund strategies also provide low-cost access. Toronto’s Purpose Investments has a number of hedged ETFs, including the Purpose Multi-Strategy Market Neutral Fund. IndexIQ has the IQ Hedge Multi-Strategy Tracker ETF, a six-hedge-fund strategy package with an AUM of $1.1 billion. The Purpose and IndexIQ hedge ETFs have MERs of 0.80% and 0.75%, respectively, making them more expensive than an S&P 500 ETF but still cheaper than a traditional hedge fund.
“If you’re an advisor and can get a similar performance for cheaper, then you’ll do that,” Patti said. “Fees are on a downward trend.”
Related stories:
Are you getting caught up in a ‘race to the bottom’ on costs?
Are active managers costing clients by playing safe?
Statistics from hedge fund database provider Eurekahedge showed that a decade ago, hedge funds charged an average annual management fee of 1.68% of a client’s assets, according to the Globe and Mail. In 2015, it was at 1.44%, and last year it went down to 1.39%. At the higher end of the fee spectrum, US-based hedge fund Tudor Investment cut its fees to 2.25% on assets and 25% on profits, down from 2.75% and 27%, respectively.
Adam Patti, CEO at New York-based alternative-asset ETF provider IndexIQ, didn’t find it surprising; assets managed by hedge funds contracted by US$21.8 billion last year, which has not happened since 2008. Aside from that, their historical performance of 3%-6% over the risk-free rate no longer seems lucrative as the risk-free rate is almost at zero.
The industry is also experiencing fallout from the mutual-fund fee wars. “We’re finally starting to see competition in the fee area with mutual funds,” said Eric Kirzsner, a finance professor at Rotman School of Management. “The same thing is happening in the hedge fund industry.”
High-net-worth investors have started to bargain hard, aiming for access to hedge-fund level strategies at lower price points. This is possible through certain mutual funds. For instance, Vancouver-based Nicola Wealth has included hedge-fund exposure in some of its mutual funds, such as the 5% allocation it allows for its balanced portfolio. Some of the strategies are managed internally, but others are done by hedge fund companies such as California-based Altegris and Toronto’s Polar Asset Management Partners.
According to Nicola Wealth Alternative Strategies Manager Ben Jang, the firm has to pay 2% on assets and 20% on profits to some of the hedge fund managers it works with — a cost worth bearing for some hard-to-replicate strategies. Nicola’s investors aren’t on the hook for such fees, however; they just have to pay the firm between 0.5% and 1.25% on their assets.
Certain ETFs that track hedge fund strategies also provide low-cost access. Toronto’s Purpose Investments has a number of hedged ETFs, including the Purpose Multi-Strategy Market Neutral Fund. IndexIQ has the IQ Hedge Multi-Strategy Tracker ETF, a six-hedge-fund strategy package with an AUM of $1.1 billion. The Purpose and IndexIQ hedge ETFs have MERs of 0.80% and 0.75%, respectively, making them more expensive than an S&P 500 ETF but still cheaper than a traditional hedge fund.
“If you’re an advisor and can get a similar performance for cheaper, then you’ll do that,” Patti said. “Fees are on a downward trend.”
Related stories:
Are you getting caught up in a ‘race to the bottom’ on costs?
Are active managers costing clients by playing safe?
