AIM'’s head of Canada believes reports shows that industry is maturing and able to deliver more customised solutions for clients
The growing trend of a hedge fund manager having “skin in the game” is helping align investment interests, especially in the retail channel, according to the Alternative Investment Management Association.
A recent survey undertaken by AIMA and RSM revealed that 76% of managers had significant personal capital invested in their funds. For Claire Van Wyk-Allan, director, head of Canada, it’s confirmation of a welcome evolution in the industry, along with the fact that the classic “2 and 20” fee model is no longer the standard structure charged by hedge funds.
Van Wyk-Allan said the report showed that attention is no longer solely on fees and that the new average management fee is of 1.3% of assets under management and 1.4% for new funds launched in the past 12 months.
The findings also demonstrated that a maturing industry and institutional investor base now require hedge funds to deliver customised solutions, closer collaboration and closer communication.
She told WP: “We are seeing the industry transition from manager-led products to investor-led solutions and to increased customisation and alignment on investments.
“Institutional investors are able to take on greater capacity with trades and co-invest alongside [clients], and we are seeing more of that. Obviously, the scale and size and institutional investors lends itself to being able to customise products with managers and I think in the 10-plus years post the financial crisis, it’s part of that natural evolution of the industry where there is an increased collaboration on all sides of the business.”
Other key findings include 75% of managers saying that a long-term investment commitment or an exchange of knowledge with investors is essential, while nearly all respondents have a performance fee high-water mark with their investors and almost 40% use hurdle rates to set a minimum return for client(s) before a performance fee can be charged.
Also, almost 80% of managers would reduce management fees in return for a greater share of performance.
Van Wyk-Allan said the financial crisis has, to some degree, separated the wheat from the chaff in the hedge fund space and that there has been a significant shift since the 2008 crash.
She said: “Looking back to the financial crisis and 10-plus years onwards, the industry is so focused on risk management and a culture of additional protocol on due diligence and ensuring the policies, procedures and best practices are followed.
“I think that the bulk of the industry is truly focused on risk-adjusted returns, so not attempting to shoot the lights out! It’s really slow and steady capital preservation, and volatility and risk reduction in order to maintain long-term wealth.”
While fees are being lowered for hedge funds, Van Wyk-Allan said this can only be a positive for investors but stressed the dangers of people racing to the bottom and relinquishing this level of expertise.
She said: “For funds in Canada on the hedge fund side, you will see performance fees of even [as low as] 15% based on specific funds and the cost of running that fund.
“But it’s important to note why there is a management fee. It’s dangerous to have retail investors racing to the bottom of management fees because this rise we’ve seen in ETFs and low-fee investors, while there is certainly a place for them in portfolios, there is also value in paying for advice and certainly value in paying for professional money management.”