Statistical errors
Hedge fund fees: Contrary to one recent survey, hedge fund fees don’t seem to be going down. Average management fees have long hovered around 1.5 per cent, not the 2 per cent of lore. Some battered funds have made concessions to hold on to clients, but the overall picture hasn’t changed. Even so, it’s possible that investors are now better placed to get more for their money.
Hedge fund data are problematic. For example, try as they might to address such things, indexers of performance are bedeviled not only with incompleteness but also with problems like survivorship bias – the tendency of badly performing funds to shut down and fall out of indexes.
So it is with fees. The standard package may be “2-and-20”, meaning a 2 per cent annual management fee plus 20 per cent of gains. But plenty of funds charge less or more. A recent survey from Preqin concluded that because management fees, on an average, turned out to be 1.63 per cent, they had been forced down by pressure from institutions and other investors and by last year’s awful performance by many funds.
But longer-term data from PerTrac Financial Solutions suggest that the average for management fees has hovered around 1.5 per cent for at least 10 years, holding above 1.6 per cent since about 2006. That’s consistent with Preqin’s most recent result — but having the history leads to a different conclusion, namely that the downturn hasn’t pushed fees down much, if at all — at least not yet.
The widely-quoted 20 per cent performance fees aren’t quite right, either. Preqin reckoned these averaged out at a bit above 17 per cent. PerTrac’s data, which put the average north of 18 per cent, does show these fees slipping a bit in the last two years.
While that might be an early sign of investor pressure, the current level is still well within the range over the past decade.
Of course, average figures don’t tell the whole story. But even if fees haven’t changed, investors may still be getting improved fund governance, greater transparency (thanks to systems that cost the fund managers more), more balanced investment terms, and fees that may look the same but are structured differently —for example, with performance considered over several years. Investors at large should hope a few things have changed. Otherwise they, like many policymakers, may have missed their chance