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Hedge funds with higher fees perform better, study shows

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GLOBAL – Hedge fund managers charging more than 20% in management fees have recorded the best net returns over the past six years, according to a study by Preqin.

Preqin found that the hedge funds that have produced the highest net returns for investors on a three and five-year annualised basis generally charged performance fees of more than 20%.

It also noted that funds with fees of more than 20% produced the strongest risk-adjusted net returns, with a Sharpe ratio of 2.11 over a three-year period.

However, Preqin said the institutional investors responding to its survey still saw the need for greater alignment of interests with hedge funds.

It also pointed out that the proportion of respondents who believe that interests are properly aligned has fallen, from 74% in 2012 to 64% in 2013.  

When asked where the alleged misalignment of interests was most pronounced, the majority of respondents (55%) pointed to management and performance fees.

However, Preqin also noted that 68% and 58% of investors acknowledged an improvement in the levels of management and performance fees, respectively, being charged over the past 12 months.

Amy Bensted, head of hedge fund products, said: "Hedge fund fees have been a topic of much discussion over the past five years as investors have called for more favourable terms.

"In a competitive fundraising climate, 58% of investors have seen reductions in performance fees over the past year."

Bensted added that the fact some funds charged performance fees above the industry standard of 20% suggested some institutional investors were happy to pay more for strong performance.

"The funds with the highest fees have also been shown to offer other concessions to investor demands – for instance, by showing greater use of hurdle rates, which must be met before performance incentives are charged," she said.

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