LONDON Dec 9 Traders launching a hedge fund
need to raise at least $300 million in assets to pay for rising
regulatory costs and to offset lower fees, a survey showed, a
far cry from the pre-crisis days when managers could start with
tens of millions.
According to the survey by Citi, hedge funds now charge
annual management fees of as low as 1.58 percent of assets, down
from the traditional 2 percent that larger funds still command.
Added to this, compliance and regulatory costs have risen
because of new rules such as the Alternative Investment Fund
Managers Directive in Europe and Dodd-Frank legislation in the
"Fee compression continues to reshape the business of hedge
funds, lowering fees even as expenses rise, all but eliminating
fee-only operating margins, and raising the level of assets
needed for a hedge fund business to succeed," said Alan Pace,
Global Head of Prime Brokerage and Client Experience at Citi.
The findings underline the diverging fortunes of hedge funds
today. While larger firms have sucked in the bulk of new cash
flooding into the industry from institutional investors, smaller
funds have struggled to raise assets.
The structure of hedge fund fees - typically an annual 2
percent management charge and a 20 percent performance fee -
also means bigger firms can enjoy huge revenues and absorb
increased regulatory costs even without generating positive
returns for their clients.
By contrast, until smaller funds break the $1 billion in
assets mark, they will struggle to cover expenses from
management fees alone, the survey showed, meaning managers must
increase assets and produce a positive performance or subsidise
a loss-making business.
The situation is worse in Europe, Citi said, where company
expenses were at least 20 percent higher than for U.S. firms and
managers are worrying more about upcoming regulations.
The study surveyed 124 hedge fund firms representing $465
billion, or 18 percent plus of total industry assets.