Daily Management Review

Hedge Fund Fees Have Dropped To Their Lowest Level Since The 2008 Financial Crisis, According To HFR


Hedge Fund Fees Have Dropped To Their Lowest Level Since The 2008 Financial Crisis, According To HFR
Fees for hedge fund have fallen down to their lowest level since the global financial crisis in 2008, according to research firm Hedge Fund Research (HFR), as investors face high inflation and recession fears.
HFR reported that hedge fund base fees fell by one basis point (bps) from the second to third quarters of 2022, to an estimated 1.35%, and that average incentive fees fell by four bps to 16.01%.
According to a firm note, both estimated fees are at their lowest levels since HFR began publishing the estimates in 2008.
It was a difficult year for some types of hedge funds, particularly long-only stock investing firms, which were battered by declines in all three of Wall Street's main indexes, which recorded their first yearly drop since 2018 as rising inflation and the risk of recession dampened investment in equities.
The HFRI 500 Fund Weighted Composite Index, which tracks many of the largest global hedge fund performances, fell by 2.78% year to date through November 2022, while a larger index tracking the entire industry fell by 3.87%.
Hedge fund managers are traditionally known for charging two-and-20 fees, which means a lower constant percentage is applied to the amount of assets managed in the hedge fund, followed by a higher incentive fee as part of profit sharing when performance numbers rise.
"Fees are still too high, especially in relation to the meagre result, which unfortunately has been going on for too long," said Bruno Schneller, a managing director at INVICO Asset Management.
According to HFR, larger hedge funds performed better in the third quarter of 2022. The top hedge funds in their weighted composite index returned 10.9%, while the bottom decile returned 14.3%.
"The hedge funds that attract the most capital and charge the highest fees are usually the managers with a long, successful track record," said David Bizer, managing director of investment firm Global Customised Wealth. "Many of the best funds are closed to new capital in order preserve their ability to generate attractive returns."
He added that easy-to-access hedge funds may not be the best ones to invest in.
According to HFR, the number of new hedge funds launched in the third quarter of last year dropped to 71, nine fewer than the previous quarter and the lowest since the fourth quarter of 2008.