This issue includes a focus on AIMA’s latest research, “In Harmony – How hedge funds and investors continue to strike the right note in aligning their interests” (carried out with RSM). The report highlights three inter-related trends: customisation, collaboration and communication. “The industry is moving from more manager-led products to more investor-led solutions,” says AIMA’s Managing Director, Global Head of Research & Communications, Tom Kehoe.
Customisation has increased markedly. Over half of those surveyed prioritise it, up from 16% when AIMA carried out its “In Concert” survey in 2016. Managed accounts and funds of one are the most popular ways to obtain customisation. ESG is another – two thirds of respondents have seen increased interest in this over the past year. It could range from a segregated vehicle to a tweaked strategy, perhaps tailored to a particular sector.
Another route to customisation is through co-investments, which are also on the rise: one in five respondents already offer them and half are prepared to do so. “Historically co-investments came from the private equity industry, and are now being used by hedge fund investors in both public and private markets,” says Kehoe. “Investors who have such co-investment arrangements do enjoy more competitive fees. Care is taken to ensure that co-investment allocation policies are fair to all investors.”
Co-investments are one sign of collaboration, which is also seen in managers investing as much as 80% of their capital in their own strategies when funds are founded. They then go on to reinvest a high proportion of bonuses into the strategy. For many years, the EY Global Alternative Fund Survey (formerly the EY Hedge Fund Survey) has made it clear that average hedge fund fees have come down from two and 20. The AIMA report confirms this and identifies a number of other fee trends. “Tiered” fees are a growing practice, whereby the management fee declines as firm assets grow. Management fees can also be traded off against performance fees; and/or lower performance fees may be offered in return for longer lockups. Hurdle rates in deriving performance fee structures are becoming more widely used, most often for activist, credit and event-driven funds. Hurdle rates can be defined in absolute terms or relative to a beta benchmark so that performance fees only apply to alpha.
In addition, non-fee costs are often being capped to keep total expense ratios/ongoing charge ratios within pre-agreed limits. Non-fee costs typically range between 30 and 50 basis points for start-ups. But they are often offering reduced fees through a founder’s share class, so the total expense ratio could often be comparable to (or even lower than) that on more established funds, where non-fee costs typically range between 15 and 30 basis points. Event-driven funds apart, a majority of hedge fund managers are now bearing the costs of research rather than charging them to the fund. And alternative data costs are only charged to the fund by 22% of respondents.
Communication with investors can often entail position level transparency for higher turnover strategies such as CTAs and managed futures. But it is also more likely to involve risk aggregation exercises for strategies with longer holding periods. Communication of managers’ evolving investment strategies may be implemented through publishing white papers, technical papers, and academic research as well as hosting seminars. The level of two-way dialogue between managers and investors has now reached the stage where some larger hedge funds are offering their investors’ staff secondment opportunities. This is a true sign of the partnership mentality that exists between both incumbents.