A new benchmarking study conducted by Barclays' Capital Solutions team, consisting of ~50 hedge fund managers with ~$360 billion in assets under management (AUM), found that respondents who have remained the most resilient to the generally challenging returns environment and relentless fee pressure, were those which were nimble and strategic in managing their economies of scale.
In order to grow AUM, managers have been diversifying their businesses and adding products to better align with investor needs and expectations, especially around lower fees, more transparency, and increased customization for individual investor mandates. Within the sample, managers with $100-500 million in AUM offered a median of 1 product, while managers with more than $10 billion in AUM offered a median of 33 products.
Note: All other figures refer to Capital Solutions study results only. *Pari Passu managed accounts are not considered incremental products
The alternative products added by the largest managers include long-only, UCITS/40 Act Funds, and Customized Managed Accounts. Long-only appears to be the most popular of the alternative products to the largest managers, as 89% of the managers sampled with $10 billion+ in AUM have an offering. This popularity seems to stem from the fact that long-only products are relatively easy to administer and cheaper to scale compared to other alternative products.
Note: All other figures refer to Capital Solutions study results only.
As hedge funds grow and become increasingly complex and diversified, their headcount composition also undergoes a general evolution. In the funds with $100-500 million in AUM, 52% of the headcount is comprised of investment professionals (IP), such as traders, analysts, and portfolio managers, with the remaining 48% comprised of non-investment professionals (NIP) such as human resources, legal & compliance, and risk. This 1-1 ratio between IPs and NIPs shifts to a heavier NIP weighting as funds grow their AUM – at $10 billion+ in AUM there are roughly 1.63 NIPs for every IP.
This is mainly due to many NIP functions, which are often outsourced at smaller managers, becoming internalized as assets increase; it also suggests that as AUM increases and the business becomes increasingly complex, a larger percentage of support staff is required to effectively manage the business.
Note: Only management fees of firms where we have 6 years of data included in calculating median
Downward fee pressure has been a key driver for the recent developments in hedge fund manager financials. While the common management fee is thought to be 1.5~-2%, our respondents paint a more difficult picture. Management fees have deteriorated from a median of 151 basis points (bps) in 2011 to 126 bps in 2016, a 25 bps drop. We found that of the 25 bps deterioration, ~5 bps was due to an increase in long-only assets, and the remainder was generally attributable to fee erosion in existing products as well as the launch of new lower fee products.
The lower fee environment has prompted managers to change their approach by pursuing economies of scale across different AUM brackets and business models. Those that have successfully navigated this shift were able to most materially mitigate fee deterioration.
Looking under the hood is Barclays Capital Solutions team’s recurring benchmarking study of hedge funds across a variety of factors, particularly headcount and financials. The objective is to help provide hedge fund CEOs, CFOs, COOs, and founders with analysis and insight that will enable them to benchmark their business against peers.
If you are interested in the full study Looking under the hood, available to clients of Barclays Investment Bank, or if you would like to learn more about the Capital Solutions team’s services and reports, please contact firstname.lastname@example.org.
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