Alternative asset managers are exploring a broader set of performance fee and management arrangements designed to improve the alignment of their interests with investors, according to a new survey by the Alternative Investment Management Association.
The study of 120 alternative investment fund management firms looked at the design of manager remuneration, investment terms and other methods that deepened the relationship between alternative asset managers and investors.
The report confirmed emerging trends such as claw backs, in which a share of past performance fees are returned to investors during loss-making periods and skin in the game, in which managers invest their own personal capital alongside their clients’ investments. These practices can strengthen the manager/client relationship and can result in investors agreeing to lock up their capital for a longer period of time, according to the study.
“Hedge funds and other categories of alternative investment funds have, for decades, offered close alignment of interest with their investors,” said Jack Inglis, chief executive officer of the Alternative Investment Management Association.
“…What our survey shows is that managers now have a much larger array of tools at their disposal and are able to create ever closer and more tailored alignment. This trend helps to explain why, with only isolated exceptions, pensions and other investors have remained loyal to hedge funds in recent years.”
The report also found that:
- 33 per cent of managers now charge performance fees above a hurdle rate such as a fixed percentage or an index-based benchmark;
- 77 per cent of managers offer or are considering offering a sliding fee scale, whereby management fees are reduced as the fund raises assets above particular thresholds;
- 97 per cent of managers charge performance fees only above a high watermark, the fund’s highest previous value;
- Longer lock-ups in exchange for lower fees and other beneficial terms are increasingly common;
- The majority of managers now agree to calculate and charge performance fees annually, rather than throughout the year, such as when profitable positions are closed out;
- In firms where staff invest their own capital in the fund, nearly 30 per cent said that principals and employees were the source of more than 10 per cent of the fund’s total assets under management;
- 61 per cent of managers consider that having a significant personal investment in the fund is the single most important method for aligning interest with their investors;
- 48 per cent offer or are considering offering co-investment to their investors, via either a particular investment opportunity or jointly-managed fund; and
- Disclosing data has increased substantially since the financial crisis, and investors are given greater access to portfolio managers.