The 'two and 20' fee structure that was standard for alternative funds is moving towards 1.5 and 20 as hedge funds, private equity and infrastructure funds are forced to reduce fees, says a survey.
A 2% management fee plus a 20% performance fee was typical for alternative vehicles, and allowed top-performing managers to earn billions. But the survey of 5,000 asset management firms by investment consultancy Mercer says “supply and demand dynamics have led managers to be more flexible in negotiating fees”.
The change may reflect an increased reliance on institutional investors. These have displaced high-net-worth investors as the main source of capital for hedge funds and other vehicles, and may be better placed to secure fee discounts.
For active investment funds as whole, Mercer says fees have been “remarkably resilient”. A third of managers have increased their fees, particularly small-cap equity managers outside the United States.
The greatest fee reductions have happened in equity mandates, says Mercer. Retail equity funds have tended to reduce fees more than institutional funds and segregated mandates.
In all, the majority of asset managers left fees unchanged, says the firm. But though this may seem a success for the industry, particularly given many funds' mixed performance in volatile markets, Mercer warns active managers may lose out in future if they are not flexible.
“As we move from a defined benefit based pensions system to a defined contribution based pension system, which is much more cost conscious, our hope and expectation is that we see some innovation in this area, as otherwise the demand for active management may well fall off a cliff,” says Divyesh Hindocha, global director of consulting for Mercer’s Investments business.
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