Once upon a time, hedge funds enjoyed significant demand and therefore could name their price; most charged a flat rate of 2% on assets managed and 20% on profits earned. But now, new investment vehicles such as ETFs are forcing hedge funds to compete on costs.
Statistics from hedge fund database provider Eurekahedge showed that a decade ago, hedge funds charged an average annual management fee of 1.68% of a client’s assets. In 2015, that fell to 1.44%, and last year it went down to 1.39%. At the higher end of the fee spectrum, US-based hedge fund Tudor Investment cut its fees to 2.25% on assets and 25% on profits, down from 2.75% and 27%, respectively.
“We’re finally starting to see competition in the fee area with mutual funds,” Eric Kirzsner, a finance professor at Rotman School of Management, told the Globe and Mail
. “The same thing is happening in the hedge fund industry.”
Assets managed by hedge funds contracted by US$21.8 billion last year, which has not happened since 2008. Aside from that, their historical performance of 3% to 6% over the risk-free rate no longer seems lucrative, as the risk-free rate is almost at zero.
Adam Patti, CEO at New York-based alternative-asset ETF provider IndexIQ, isn’t surprised. “If you’re an advisor and can get a similar performance for cheaper, then you’ll do that,” he told the Globe and Mail
. “Fees are on a downward trend.”
High-net-worth investors have started to bargain hard, aiming for access to hedge-fund-level strategies at lower price points. Vancouver-based Nicola Wealth, for instance, has included hedge-fund exposure in some of its mutual funds, such as the 5% allocation it allows for its balanced portfolio. Some of the strategies are managed internally, while others are managed by hedge fund companies such as California-based Altegris and Toronto’s Polar Asset Management Partners.
According to Ben Jang, alternative strategies manager at Nicola Wealth, the firm still has to pay 2% on assets and 20% on profits to some of the hedge fund managers it works with, but Nicola feels that’s a cost worth bearing for some hard-to-replicate strategies. Nicola’s investors aren’t on the hook for such fees, however; they only pay the firm between 0.5% and 1.25% on their assets.
Certain ETFs that track hedge fund strategies also provide low-cost access. Toronto’s Purpose Investments has a number of hedged ETFs, including the Purpose Multi- Strategy Market Neutral Fund. IndexIQ has the IQ Hedge Multi-Strategy Tracker ETF, a six-hedge-fund strategy package with an AUM of $1.1 billion. The Purpose and IndexIQ hedge ETFs have MERs of 0.80% and 0.75%, respectively, making them more expensive than an S&P 500 ETF but still cheaper than a traditional hedge fund.
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