Investors may protest that the standard hedge fund fees are too high in a time of lowered earning expectations, but most hedge fund investors paid the full fees last year rather than negotiating special deals. That is one of the more surprising findings in a new investor survey from Goldman Sachs Prime Brokerage.
Goldman Sachs has surveyed hedge fund allocators annually for the past 13 years to get a sense of what matters most to them when it comes to investment strategies, returns and allocations. While the firm’s asset management division conducts its own surveys of fund managers and investors about investor demands and how hedge fund managers are addressing them, the prime brokerage division’s survey is aimed strictly at what investors want. Goldman Sachs polled investors for its 2013 survey in February of this year.
One of the things investors often say they want is lower fees, as Goldman notes in a summary of the results. Yet the respondents said that 83 percent of their investments in 2012 bore full fees rather than individually negotiated ones. Even the investor constituency that Goldman Sachs terms “seemingly most aggressive in terms of negotiating fees with managers,” pension plan managers, said that 68 percent of their investments were made with full or non-negotiated fees in 2012. Endowments and foundations, which are less likely to negotiate, said that only one in 10 of their investments came with a fee discount. The average fees investor paid were 1.65 percent for management fees and 18.3 percent for performance fees.
One in three respondents said they had requested fee discounts without expecting to give the hedge fund manager anything in return, such as promises of more investment or commitments of long-term capital. But a greater number said they had offered bargaining chips; just over 40 percent of investors said they were prepared to commit more money or longer durations of investment in negotiating for lower fees.
This trend might continue as investor assets grow. Goldman expects, based on its own growth projections for 2013, that allocators with over $10 billion in assets will represent 46 percent of all global hedge fund assets by the end of this year. That is the highest the survey has every recorded and up from 39 percent at the end of 2011. At the same time, the survey found that investors are increasing their overall market exposures. Cash levels were at a post-2008 low of 5.8 percent last year, according to the survey, less than a third of the peak levels last seen in the first quarter of 2009.
Investors are, however, reducing the number of hedge funds they invest with. Among participants, 80 percent said their portfolios had 50 or fewer hedge fund managers, while 59 percent said they had allocated to 30 or fewer managers, compared with 78 percent and 57 percent, respectively, in 2011. Endowments, foundations and pension funds tended to have the most concentrated portfolios, with 80 percent saying they were invested with 30 or fewer managers.
This year’s survey, conducted in February, brought in responses from 730 investment managers representing a total of $1.4 trillion in assets invested in single manager hedge funds. The investors were mostly from the Americas — 55 percent — with another 39 percent coming from Europe and 6 percent from the Asia-Pacific. Some 47 percent of the participating investors managed institutional capital, 35 percent managed funds of funds, and 17 percent managed private capital for family offices and wealthy individuals.
