Hedge funds take fee cut, rework '2- 20' rule

Being new category, some offer zero fixed fee to attract investors; lower pricing likely for medium term

Barely a year old, the Indian hedge fund sector is already experimenting with the global standard fee structure for such investment vehicles.

Hedge funds the world over typically charge a two per cent management fee and also take 20 per cent of any profits they make above a certain hurdle rate, the so called '2 and 20' model.

Indian hedge funds are reworking this. Some take one per cent in fixed fees, others 1.5 per cent. Some are even willing to take zero per cent, according to sources. Their cut of the profits are also said to be 15 per cent in some cases and even 10 per cent in others.

HEDGE PRICING

• Globally, hedge funds charge 2% fixed fees and 20% of profits
• Indian hedge funds mostly offer less; fixed fees can go down to zero, with profit sharing of 10-15 per cent
• Nascent nature of sector, price-sensitivity of investors are primary causes

Swapnil Pawar, chief investment officer at Karvy Capital, which runs a hedge fund, said the fee structure for India is unlike their global peers.

“The lower fee some funds in India are charging is unusual if one looks at the global context. Most global hedge funds follow the ‘2 and 20’ rule. Many tend to be small and independent units, which need the fixed fee to cover their expenses, since they do not have the backing of a financial institution,” he said.  

Some of it could also be due to the nascent nature of the sector, suggested Piyush Shah, director at Ambit Investment Advisors, which also runs a hedge fund. “A hedge fund as a concept is quite new in India and while there is some demand for the product, the awareness is lacking,” he said. Both declined to comment on their own individual fee structures.  

There are 16 entities which have been granted recognition as category-III alternative investment funds under which hedge funds are to be registered, according to the Securities and Exchange Board of India’s website. These include IIFL Opportunities Fund, Motilal Oswal Alternative Investment Trust, Ambit Alpha Fund, Forefront Alternative Investment Trust and Karvy Capital Alternative Investment Trust. Others which have recognition are Quant First Alternate Investment Trust, Harmony Alternative Investment Fund, Unifi AIF, Avendus India Opportunities Fund III, Malabar Capital Trust, Monsoon Alternative Investment Trust, Redart India Trust, Capveda Absolute Return Fund, DSP BlackRock Alternative Investment Fund Category III, Edelweiss Alternative Investment Trust, Mavenvest Absolute Return Fund.

Some of the funds are also experimenting with the hurdle rate, the minimum return above which the fund can get a cut of profits. Some set a higher hurdle rate of 12-13 per cent, instead of a more standard 10 per cent, says a source. They then claim a higher percentage of profits if they beat the hurdle rate. This could be as high as 25 per cent.

Prateek Pant, director, products & services, RBS Private Banking India, said Indian investors tend to be sensitive to pricing, especially in a nascent product segment. “It is a new category and I don’t really see a breakout on the pricing side till there are funds which have been able to build a credible record,” he said.