A new survey from
the Alternative Investment Management Association (AIMA) and boutique prime broker
GPP helps dispel the notion that bigger is always better regarding hedge funds’
asset under management (AUM).
The survey of
sub-$500 million firms finds that most are able to turn a profit and expand
with considerably less than $100m in assets.
The two bodies surveyed 135 alternative asset managers
globally and found that the average break-even point is around $86 million in
AUM, while around a third are able to break even with $50 million in assets or
less. Break-even was found to be highest among global macro hedge fund firms
that responded to the survey ($132 million on average) and smallest for
alternative credit fund managers ($77 million).
AIMA says the research sheds new light on the impact of
broader trends and themes on this segment of the industry, such as fee
pressures, the impact of post-crisis regulations, demands for ever greater
methods of alignment of interests, and the optimum mix between having dedicated
in-house staff and out-sourcing.
In terms of management fees, about half said they are
charging 1.5% or less. For hedge fund start-up businesses, management fees were
found to be around 1.25% on average. In terms of performance fees, about
two-thirds of smaller managers said they are charging less than 20%. About
three quarters (77%) expect performance fees to remain unchanged over the next
year while 11% expect a decrease and 12% expect an increase.
Methods of aligning interests between smaller managers and
fund investors were found to be growing. Close to 90% of funds said they have a
high watermark – a peak value above which performance fees can be charged.
Roughly one-in-three have hurdle rates – a further trigger for performance fees
agreed between the manager and investor, and while less common, 8% of smaller
managers said their flagship fund provides fee clawbacks to investors under
In good news for the employment market, more than 80% of
respondents said they planned to increase their headcount in the next 12
Although the survey is generally positive, inevitably the
survey did find a potentially negative impact of regulation. It finds that the
costs of regulation continue to weigh on smaller firms, with almost 90% of
respondents saying they allocate up to one-fifth of their total expenditure to
compliance, with this number expected to increase when firms adhere to MiFID
Legal services were found to be the most outsourced function
among smaller firms, with only 16% filling this role internally. COO,
marketing/IR, risk and compliance functions were found to be more likely to be
filled by in-house roles.
disproves the notion that only relatively large, institutionalised businesses
can succeed in the modern hedge fund industry,” says AIMA chief executive
Jack Inglis. “We have found that firms
can build strong, sustainable and growing businesses with considerably less
than $100 million in assets. This is good news not only for the future health
and well-being of the sector but for investors too, since smaller managers have
often been the source of many of the industry’s greatest innovations.”
GPP director and head of prime brokerage Sean Capstick,
adds, “We believe this is
the first comprehensive survey of the next generation of hedge fund managers.
Although this group represents two-thirds of the number of funds in the hedge
fund universe, their voice is rarely heard. This group is the incubator for
tomorrow’s ‘billion-dollar club’ and our findings show them to be in good
health, definitely alive and kicking.”