INSTITUTIONAL INTELLIGENCE State of Institutional Fees Report: Hedge Funds
A glimpse at the negotiated versus stated fees that public plans pay for hedge fund investments
Released September 2019 ABOUT EVESTMENT FEES DATA
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eVestment also extracts actual fee data from thousands of public fund documents, showing the fees managers and public funds have negotiated. With an eVestment Market Lens license, you can view and download any document, including those that disclose fee intelligence.
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EVESTMENT STATE OF INSTITUTIONAL FEES REPORT: HEDGE FUNDS 2019 | 2 EXECUTIVE SUMMARY
eVestment’s Market Lens solution contains thousands of documents with information on the actual fees public plan investors have negotiated with their traditional and alternatives asset managers. This report provides an overview of the negotiated fees from a sample of 180 hedge fund commitments made by 50 U.S. public plans, and also compares these negotiated fees to the stated fees managers have reported into the eVestment platform.
For both hedge fund managers and institutional investors in these products, having an understanding of where fee negotiations tend to start and tend to finish is important to reaching an agreement which ultimately benefits both parties. Peter Laurelli Global Head of Research Key Points from Negotiated vs. Stated Fees eVestment • Hedge fund managers are more likely to negotiate down their management fees than their performance fees.
• Discounts from stated fees were generally negotiated on larger commitments amounts.
• Two-thirds of managed futures funds offered a discount from their stated management fees.
• Fixed income-focused and equity-focused hedge funds were least likely to veer from their stated management fees.
Highlights from All Negotiated Fees
• The most common negotiated management fees were 1% (for managed futures and funds of hedge funds), 1.5% (equity and multi-strategy), and 2% (fixed income). Event driven/ distressed and macro funds charged 1.5% and 2% with the same frequency. The most common agreed upon performance fee among all direct hedge funds was the oft referenced 20%; for funds of hedge funds it was 10%.
• Managed futures funds offered the lowest negotiated fees for public plans among direct hedge fund strategies shown below, charging an average 0.7% in management and 16.4% in performance fees. Negotiated fees for managed futures strategies ranged from a 0-and-10 structure (a levered systematic index-tracker) to a 2-and-20 setup (algorithmic frontier markets-focused fund).
EVESTMENT STATE OF INSTITUTIONAL FEES REPORT: HEDGE FUNDS 2019 | 3 Negotiated Vs. Stated Fees
The negotiated versus stated fee information is based on a 1-to-1 match between the hedge funds in public plan documents and those on the eVestment platform.
Hedge fund managers more likely to negotiate down their management fees than performance fees. 38.8% of commitments in the sample below show a discounted management fee, while only 11.3% show a discounted performance fee. However, the majority of managers still did not budge from their stated fees during negotiations with public plans.
Discounts negotiated on larger commitments. The average commitment amount with discounted fees was over 2x larger than that of commitments without any change from their stated fees. USD 119 MM was the average commitment size with a management fee discount and USD 133 MM with a performance fee reduction; USD 52 MM was the average commitment size showing no change in management fees and USD 55 MM showing no change for performanceHedge Fund Management fees. Fees
HEDGE FUND MANAGEMENT FEES
3.0% 1 Management Fees (sample size 85) Proportion with Discount: 38.82% 2.5% Proportion with Increase: 4.71% Proportion without Any Change: 56.47%
2.0% 1 17
1 2 Negotiated Fee Higher Negotiated Fee Lower Than Stated Fee Than Stated Fee 1.5% 15 4
1 Negotiated Fee Negotiated 1 1 1 1 6 2 1.0% 1 1 1 1 1 1 2 1 1 1 1 21 2 1 1 1 1 1 1 2 1 1 0.5% 1 1 1
1
0.0% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0%
Stated Fee Hedge Fund Performance Fees
HEDGE FUND PERFORMANCE FEES
30.0% 1 Performance Fees (sample size 62) Proportion with Discount: 11.29% 25.0% Proportion with Increase: 6.45% 1 1 Proportion without Any Change: 82.26%
20.0% 1 1 38 2
1
1 1 15.0% Negotiated Fee Higher 1 Negotiated Fee Lower Than Stated Fee Than Stated Fee
10.0% 7 1 Negotiated Fee Negotiated
5.0%
0.0% 3 1 1
-5.0% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0%
Stated Fee
EVESTMENT STATE OF INSTITUTIONAL FEES REPORT: HEDGE FUNDS 2019 | 4 Negotiated Vs. Stated Management Fees By Strategy
Aside from equity-focused and fixed-income focused hedge funds, the other strategy groups were more willing to negotiate down on their management fees than their performance fees (see next page). On average however, each group provided a discount to public plans from their stated management fees.
Two-thirds of managed futures funds offered a discount from their stated management fees. This group was most likely to negotiate management fee reductions with public plans in our sample, on average -18 bps from their stated levels. Nearly two-thirds of funds of hedge funds negotiated down their management fees as well. Fixed income-focused and equity-focused hedge funds were least likely to veer from their stated fee.
Two funds that negotiated higher management fees removed their performance fees entirely. Another two with higher negotiated than stated fees had struck agreements with public plans prior to 2018.
EQUITY HEDGE FUNDS FIXED INCOME HEDGE FUNDS Equity HFs Management Fees Fixed Income HFs Management Fees
2.5% 2.5%
Equity HFs (sample size 13) Fixed Income HFs (sample size 11) Average Stated Fee: 1.40% Average Stated Fee: 1.73% Average Negotiated: 1.36% Average Negotiated: 1.61%
2.0% 3 2.0% 6
1.5% 3 1.5% 2
1
1
Negotiated Fee Negotiated 1 Fee Negotiated 1.0% 1.0% 2 1 2
1 1
0.5% 0.5%
0.0% 0.0% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% Stated Fee Stated Fee
MACRO HEDGE FUNDS MANAGED FUTURES HEDGE FUNDS Macro HFs Management Fees Managed Futures HFs Management Fees
3.5% 2.5%
Macro HFs (sample size 16) Managed Futures HFs (sample size 12) Average Stated Fee: 1.75% Average Stated Fee: 0.96% Average Negotiated: 1.68% Average Negotiated: 0.79% 3.0% 1
2.0%
2.5%
1.5% 2.0% 5
1 1
Negotiated Fee Negotiated 1.5% 4 2 Fee Negotiated 1 1.0% 1 1 1
1 1 1 1 1 1.0% 1 1 0.5% 1
0.5% 1 1
0.0% 0.0% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% Stated Fee Stated Fee
MULTI-STRATEGY HEDGE FUNDS FUNDS OF HEDGE FUNDS Multi Strategy HFs Management Fees Fund of Hedge Funds Management Fees
2.5% 2.5% Multi-Strategy HFs (sample size 13) Funds of Hedge Funds (sample size 16) Average Stated Fee: 1.60% Average Stated Fee: 1.08% Average Negotiated: 1.40% Average Negotiated: 0.87%
2.0% 1 2.0% 1
1 1
1.5% 6 1 1.5%
Negotiated Fee Negotiated 1 1.0% 1 Fee Negotiated 1.0% 1 1
1 1 1 1 1 1 1 1 1 1 1
0.5% 1 1 1 0.5%
0.0% 0.0% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% Stated Fee Stated Fee
EVESTMENT STATE OF INSTITUTIONAL FEES REPORT: HEDGE FUNDS 2019 | 5 Negotiated Vs. Stated Performance Fees By Strategy
Negotiated performance fees were not as frequently cited as management fees in public plan documents. Among those that were cited, four in five funds kept their performance fees unchanged from their stated level, but there were some unique compromises. For instance, one macro fund manager and public plan settled on a +100 bps higher management fee and the removal of the performance fee entirely; a fund of hedge funds with a sliding fee schedule also did not charge a performance fee for a large, USD 300+ MM, commitment; and a multi-strategy fund lowered both of their fees during negotiations, taking off -25 bps from the stated management fee and -500 bps from the stated performance fee.
Three-fourths of direct hedge funds charged the common 20% in performance fees to public plans.
EQUITY HEDGE FUNDS FIXED INCOME HEDGE FUNDS Equity HFs Performance Fees Fixed Income HFs Performance Fees
30.0% 30.0%
Equity HFs (sample size 10) Fixed Income HFs (sample size 11) Average Stated Fee: 17.50% Average Stated Fee: 20.00% Average Negotiated: 17.00% Average Negotiated: 19.77%
25.0% 25.0%
20.0% 7 20.0% 10
1
15.0% 15.0% Negotiated Fee Negotiated Fee Negotiated
10.0% 2 1 10.0%
5.0% 5.0%
0.0% 0.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% Stated Fee Stated Fee
MACRO HEDGE FUNDS MANAGED FUTURES HEDGE FUNDS Macro HFs Performance Fees Managed Futures HFs Performance Fees
30.0% 25.0%
Macro HFs (sample size 15) Managed Futures HFs (sample size 6) Average Stated Fee: 19.33% Average Stated Fee: 14.67% Average Negotiated: 18.33% Average Negotiated: 15.67%
25.0% 1 20.0% 1 1 1
1
20.0% 12 1 15.0%
15.0%
10.0%
Negotiated Fee Negotiated 10.0% 1 Fee Negotiated
5.0%
5.0%
0.0% 1 0.0% 1
-5.0% -5.0% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% Stated Fee Stated Fee
MULTI-STRATEGY HEDGE FUNDS FUNDS OF HEDGE FUNDS Multi Strategy HFs Performance Fees Fund of Hedge Funds Performance Fees
35.0% 15.0%
Multi-Strategy HFs (sample size 11) Funds of Hedge Funds (sample size 6) Average Stated Fee: 20.45% Average Stated Fee: 5.83% Average Negotiated: 20.45% Average Negotiated: 5.00% 30.0% 1
10.0% 3 25.0% 1
20.0% 2 6 5.0%
Negotiated Fee Negotiated 15.0% Fee Negotiated
10.0% 1 0.0% 2 1
5.0%
0.0% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% -5.0% 0.0% 5.0% 10.0% 15.0% Stated Fee Stated Fee
EVESTMENT STATE OF INSTITUTIONAL FEES REPORT: HEDGE FUNDS 2019 | 6 Detailed Negotiated and Discount from Stated Fee Data
The tables below display all fee details from each segment covered in the report for reference and comparison. Average After Discount and Average Discount from Stated only include (a) funds that were a 1-to-1 match between public plan documents and those on the eVestment platform and (b) funds that negotiated a fee reduction from their stated fee; funds without any fee reduction or a fee increase were excluded from these two fields.
All Direct Hedge Fund Commitments Macro Hedge Funds
Management Fee Performance Fee Management Fee Performance Fee
Most Common 2% 20% Most Common 1.5% & 2% 20%
Average Negotiated 1.35% 18.43% Average Negotiated 1.36% 18.33%
Weighted Average Negotiated 1.21% 18.28% Weighted Average Negotiated 1.46% 19.40%
Average After Discount 1.09% 13.75% Average After Discount 1.47%
Average Discount from Stated 42 bps 658 bps Average Discount from Stated 44 bps
Total Commitments 134 Total Commitments 30
Commitments with Amounts 97 Commitments with Amounts 20
Average Investment Amount $66.94 million Average Investment Amount $62.50 million
Funds of Hedge Funds Managed Futures Hedge Funds
Management Fee Performance Fee Management Fee Performance Fee
Most Common 1% 10% Most Common 1% 20%
Average Negotiated 0.84% 7.31% Average Negotiated 0.86% 16.40%
Weighted Average Negotiated 0.75% 9.22% Weighted Average Negotiated 0.84% 19.34%
Average After Discount 0.76% Average After Discount 0.71%
Average Discount from Stated 36 bps Average Discount from Stated 28 bps
Total Commitments 46 Total Commitments 17
Commitments with Amounts 26 Commitments with Amounts 14
Average Investment Amount $239.27 million Average Investment Amount $98.86 million
Equity Hedge Funds Multi-Strategy Hedge Funds
Management Fee Performance Fee Management Fee Performance Fee
Most Common 1.5% 20% Most Common 1.5% 20%
Average Negotiated 1.44% 18.08% Average Negotiated 1.41% 20.33%
Weighted Average Negotiated 1.35% 17.02% Weighted Average Negotiated 1.22% 19.51%
Average After Discount 1.23% Average After Discount 1.30% 20.00%
Average Discount from Stated 28 bps Average Discount from Stated 50 bps 500 bps
Total Commitments 32 Total Commitments 19
Commitments with Amounts 26 Commitments with Amounts 12
Average Investment Amount $49.04 million Average Investment Amount $68.83 million
Fixed Income Hedge Funds Event Driven Hedge Funds
Management Fee Performance Fee Management Fee Performance Fee
Most Common 2% 20% Most Common 1.5% & 2% 20%
Average Negotiated 1.45% 18.04% Average Negotiated 1.46% 18.89%
Weighted Average Negotiated 1.16% 17.90% Weighted Average Negotiated 1.30% 17.36%
Average After Discount Average After Discount 1.25%
Average Discount from Stated Average Discount from Stated 50 bps
Total Commitments 22 Total Commitments 14
Commitments with Amounts 13 Commitments with Amounts 12
Average Investment Amount $81.08 million Average Investment Amount $58.67 million
EVESTMENT STATE OF INSTITUTIONAL FEES REPORT: HEDGE FUNDS 2019 | 7 METHODOLOGY
For this glimpse into negotiated fee data between public plans and hedge funds, we used public plan documents from 2014 to present, but only included the most recent management and performance fee data provided (i.e. removed older negotiated fees between the same public plan/hedge fund and only used the newer fee terms when available).
The fees in these plan documents are the actual negotiated fees. The stated fees are those from manager-reported hedge fund profiles within eVestment’s global database. In public plan documents there are instances where hedge funds have offered sliding fee schedules similar to traditional institutional separate accounts; these sliding fees were used to calculate negotiated fees. Stated fees were based on manager-reported data, so if sliding fee schedules were not listed we used the base management/performance fee that was reported in the database. In some public plan documents there were only details on management fees.
When doing the 1-to-1 comparison between individual funds’ negotiated versus stated fees, the averages for management fees were based only on instances where funds had both negotiated and stated fees, and similarly the averages for performance fees were based on the same.
EVESTMENT STATE OF INSTITUTIONAL FEES REPORT: HEDGE FUNDS 2019 | 8 ABOUT EVESTMENT eVestment, a Nasdaq company, provides institutional investment data, analytics and market intelligence covering public and private markets. Asset managers and general partners reach the institutional marketplace through our platform, while institutional investors and consultants rely on eVestment for manager due diligence, selection and monitoring. eVestment brings transparency and efficiency to the global institutional market, equipping managers, investors and consultants to make data-driven decisions, deploy their resources more productively and ultimately realize better outcomes.
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