In its latest monthly report, Preqin notes that hedge fund charges have come under pressure in recent years. Indeed, a survey conducted by the firm in July found that although 58% of investors agreed performance fees had fallen over the preceding 12 months, a similar proportion said they needed to improve further.
Yet analysis of strategies with performance charges of more than 20%, versus those with fees of 20% or less, suggests investors remain willing to pay extra for superior long-term returns.
| <20% | 20% | >20% | |
|---|---|---|---|
| 2013 YTD | 6.35% | 4.10% | 7.29% |
| 12-month | 13.32% | 8.69% | 13.29% |
| 3-year annualised | 6.89% | 7.98% | 10.73% |
| 5-year annualised | 7.31% | 8.34% | 10.55% |
| 3-year Sharpe | 0.70 | 1.18 | 2.11 |
Such funds produced double-digit annual performance over the three and five years ending July 31, 2013 – well ahead of their lower-cost peers. In addition, volatility was lower over three years, giving the funds a significantly higher Sharpe Ratio (see table).
“For investors seeking consistent, strong, risk-adjusted returns, funds which charge the higher performance fees should not be discounted, as they have demonstrated their ability to meet these goals over the long-term,” wrote Amy Bensted, Preqin’s head of hedge fund products.
“However all managers should be mindful that regardless of what fee they charge, if they do not live up to expectations, investors will not hesitate to appeal against performance-based bonuses incongruent to returns, or even exit the fund completely.”
As Expert Investor Europe reported last month, performance fees appear to be under pressure in the Ucits “hedge fund-lite” sector. A study by Alceda Fund Management found that the 62% of such strategies which charge a 20% performance levy account for less than a third of overall assets.
A PDF of the Preqin Hedge Fund Spotlight report for August can be downloaded from the company’s website, here.
