Hedge Fund Expert Shares Top Trends For 2017: 'Fees Will Continue To Evolve'

Don Steinbrugge is one of the best-known experts in the hedge fund industry, with over three decades of experience in the field. He has been running Agecroft Partners, a global, award-winning hedge fund consulting and marketing firm for almost 10 years now.

Prior to Agecroft, Steinbrugge spent 18 years working with institutional investors, serving as the head of institutional sales for Merrill Lynch Investment Managers — now part of BlackRock, Inc. BLK — and then as founding principal of Andor Capital, the second largest hedge fund firm in the world at the time.

Benzinga had the chance to chat with this seasoned hedge fund industry expert, who shared some predictions for trends in the space in 2017. In this article, we’ll look into hedge fund fees and their evolution.

The Evolution Of Fees

Agecroft’s first prediction concerns the continuation in the evolution in hedge fund fees.

“Hedge funds historically had two different types of fees; one was a management fee, and that was a percent of the assets, and, if you went back 10 years ago, the average hedge fund was getting about 2 percent management fee per year. The second fee they get is a performance fee, and traditionally, it's been 20 percent of whatever performance they generate. And they get both,” Steinbrugge explicated.

However, he continued, “there's been a lot of fee pressure put on hedge funds over the past five years and, as a result of that, hedge fund fees are coming down in a number of different ways:”

“Most of the hedge fund money is going to very large hedge funds. Roughly 70 percent of assets are with hedge funds that have $5 billion or more [in assets under management]. There are 15,000 hedge funds and a majority of those are below $100 million. And, last year, only 5 percent of assets went to hedge fund managers with less than $100 million in assets [under management]. So, these managers are having a great amount of difficulty raising money. A trend in the hedge fund industry is that they are coming out with something called 'founders share,' which are huge discounts on fees for investors who invest early, when the hedge fund is small. Then, those fees are grandfathered once assets get above $150 million or $200 million.”
• “Fees are also coming down significantly for large pension funds [...] What hedge funds have begun to do is scale their fees. Basically, the more money you invest, the lower the fee.”
• “Another thing hedge funds are doing is negotiating fees with these large managers. What they are trying to do is really tailor the fee to the needs of a large pension fund [...] [In addition, hedge funds] are willing to consider a hurdle, which is basically: 'you have to return a certain percent before the performance fee kicks in.' And, they are also willing to negotiate kind of a crystallization period of the performance fee; so, typically the performance fee is payed once a year, and some of these institutional investors are asking hedge funds to lengthen the crystallization period after three years.”