(August 30, 2013)—Hedge funds charging higher performance fees are, on average, producing better returns, according to data from Preqin.
At the top end, funds that charge upwards of 20% in management fees produced the strongest risk-adjusted returns.
Funds making positive returns each month since inception charge investors an average of 19.5% in performance fees.
At the opposite end of the performance scale—defined by Preqin as only having positive returns a quarter of the months since inception—funds charge only 16.67%. Only funds with at least a three-year track record were included in the calculations.
“Investors are satisfied to pay higher compensations to those managers that have produced strong performance,” Amy Bensted, head of hedge funds products at Preqin, said. “The funds with the highest fees have also shown to offer other concessions to investor demands.”
However, Bensted recommended investors should not discount funds with higher performance fees as they have “demonstrated their ability to meet these goals over the long-term.”
Despite evidence that firms that charge more are producing better returns, investors are still concerned with the alignment of interests between them and their hedge funds.
Only 64% of investors believed their interests are well aligned with those of the managers, with 55% seeking reductions in management and performance fees.
Preqin’s data arrived on the back of research from Morningstar, which showed an overall rise in hedge fund performances in July this year.
The Morningstar and MSCI’s composite hedge fund index increased 1.1%, giving its year-to-date index a push to 4%.
Global stock and bond indices as well as MSCI World NR global stock market also saw a climb in numbers.
“Most hedge fund strategies notched gains in July following June’s decline,” AJ D’Asaro, a fund analyst at Morningstar, said.
Developed market strategies performed the best with an advancement of 2.0% in July, turning its year-to-date figures to 6.4%. North American, small-cap, European, and unhedged European funds all performed well.
However, some funds struggled amidst the rising trend.
The Morningstar and MSCI’s emerging markets hedge fund index increased only 0.7% in July and 2.7% for its year-to-date, possibly due to slow growth and high inflation. Fixed income index and fixed income arbitrage index also saw weak returns.
Indexed systematic trading funds fell 0.4% in July, contributing to its year-to-date fall of 1.8%. This two-year downfall is partly caused by hedge fund strategies struggling to adjust to market volatility and its impact on trading algorithms, Morningstar said.
The data also showed positive net inflows for single manager and multi-strategy hedge funds for the first half of 2013.
Single-manager hedge funds saw outflows of $851 million but gathered $1.3 billion in inflows for the year so far, while multi-strategy hedge funds found outflows of $1.4 billion but maintained a positive net flow of $417 million for the first half of 2013.
Systematic trading strategies saw an outflow of $267 million in June, adding to its year-to-date number of $3.6 billion.
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Sage Um
Assistant Editor, aiCIO
sum@assetinternational.com
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