Managers rush to ‘1 or 30’ as fee restructures become the norm

Extensive research from HFM Global and Citco highlights a sector bending to significant investor pressures

Investor research published last week by Barclays’ prime finance team suggested a positive turning of the tide in terms of investor sentiment towards hedge funds.

That is not to say managers can kick back and relax as hundreds of billions of net inflows suddenly start gushing into the sector.

But the study of 350 investors, responsible for a third of all hedge fund assets, did find a growing appreciation for the way hedge funds are looking to be flexible and engaging on terms, fees, portfolio customisation and structures as they look to meet the demands of an increasingly sophisticated investor base.

This evolution in the way hedge funds are responding to the needs of investors is borne out in our extensive research of over 220 managers, conducted in association with Citco, some of which we highlight in this week’s issue.

There has been plenty of recent coverage of certain large managers restructuring their fees, often due to investor pressure around the 2% paid on a substantial asset base, but our research highlights how far new fee arrangements have become the norm across the sector with nearly three -quarters of managers introducing new structures.

The research also highlights how managed accounts have become a staple source of inflows for many managers and the large percentage of firms looking to diversify into new strategies or experiment with new structures in the year ahead.

Last week, HFMWeek’s New York breakfast briefing debated some of the fee arrangements that might make most sense for hedge funds and their investors and the so-called “1 or 30” structure promoted by Albourne Partners and investors such as the $133bn Teacher Retirement System of Texas was the biggest talking point.

Albourne’s Jonathan Koerner (the self-styled “1 or 30 dude”) explained how the numbers were of secondary importance to the idea of agreeing with investors the appropriate share of alpha-generated performance managers should take.

He argued that given the asset growth in the hedge fund sector post-2009, a “1 or 30”-type model is actually returning the share of profits to a level the traditional 2 and 20 model used.

Large investors certainly seem to be buying into the argument with a number understood to be pushing for the structure and 20-plus large managers now offering it or planning to. Judging by our latest straw poll this could be the tip of the iceberg, with 50% of readers moving to the structure or seriously considering it.

Paul McMillan is head of content at HFM Global