Not that much, one study of small and emerging managers has found
The majority of alternative investment firms are able to become profitable and expand with much less than US$100 million in assets, according to a recent study.The Alternative Investment Management Association (AIMA), a worldwide group representing alternative asset managers, partnered with boutique prime broker GPP to survey 135 firms, each with assets below US$500 million. These firms come from the largest segment of the hedge fund industry: among 3,074 hedge funds, 2,052 have asset levels below US$500 million, according to the report.
The average break-even point among the companies surveyed was US$86 million in assets. A third were able to break even with asset levels of US$50 million or less. Global macro hedge funds had the highest average breakeven point (US$132 million), while alternative credit fund managers had the lowest (US$77 million).
“Our research disproves the notion that only relatively large, institutionalised businesses can succeed in the modern hedge fund industry,” said AIMA CEO Jack Inglis. “This is good news not only for the future health and well-being of the sector but for investors too, since smaller managers have often been the source of many of the industry’s greatest innovations.”
The study also shed light on other trends and themes affecting the segment. Looking at management fees, around half said they charge 1.5% or less; hedge-fund start-up businesses reportedly charged around 1.25% on average. As for performance fees, around two-thirds reported charging less than 20%; 77% of respondents expect performance fess to remain flat over the next year.
More of these smaller managers are adopting ways to align their interests with their clients’. Close to 90% said they have a high-water mark, a peak value over which performance fees will apply. Around one third have hurdle rates, another performance fee trigger that is agreed upon by the manager and investor. Eight percent allow fee clawbacks to investors under certain circumstances.
Almost 90% said they allocate up to a fifth of their expenditure to compliance, which they expect will cost more once firms adhere to MiFID II. Human resource costs could also rise as more than 80% of the managers polled reported plans to increase their headcount in the next 12 months.
“We believe this is the first comprehensive survey of the next generation of hedge fund managers,” said GPP Director and Head of Prime Brokerage Sean Capstick. “We are excited to have worked with AIMA to research the opportunities and challenges facing this under-represented group, and to be able to help contribute to their growth.”
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The average break-even point among the companies surveyed was US$86 million in assets. A third were able to break even with asset levels of US$50 million or less. Global macro hedge funds had the highest average breakeven point (US$132 million), while alternative credit fund managers had the lowest (US$77 million).
“Our research disproves the notion that only relatively large, institutionalised businesses can succeed in the modern hedge fund industry,” said AIMA CEO Jack Inglis. “This is good news not only for the future health and well-being of the sector but for investors too, since smaller managers have often been the source of many of the industry’s greatest innovations.”
The study also shed light on other trends and themes affecting the segment. Looking at management fees, around half said they charge 1.5% or less; hedge-fund start-up businesses reportedly charged around 1.25% on average. As for performance fees, around two-thirds reported charging less than 20%; 77% of respondents expect performance fess to remain flat over the next year.
More of these smaller managers are adopting ways to align their interests with their clients’. Close to 90% said they have a high-water mark, a peak value over which performance fees will apply. Around one third have hurdle rates, another performance fee trigger that is agreed upon by the manager and investor. Eight percent allow fee clawbacks to investors under certain circumstances.
Almost 90% said they allocate up to a fifth of their expenditure to compliance, which they expect will cost more once firms adhere to MiFID II. Human resource costs could also rise as more than 80% of the managers polled reported plans to increase their headcount in the next 12 months.
“We believe this is the first comprehensive survey of the next generation of hedge fund managers,” said GPP Director and Head of Prime Brokerage Sean Capstick. “We are excited to have worked with AIMA to research the opportunities and challenges facing this under-represented group, and to be able to help contribute to their growth.”
For more of Wealth Professional's latest industry news, click here.
Related stories:
Why the passive approach isn’t perfect
Is the Canadian hedge fund market ready to take off?
