New hedge funds need $300 mln in assets just to break even

Reuters

LONDON, Dec 9 (Reuters) - Traders launching a hedge fundneed to raise at least $300 million in assets to pay for risingregulatory costs and to offset lower fees, a survey showed, afar cry from the pre-crisis days when managers could start withtens of millions.

According to the survey by Citi, hedge funds now chargeannual management fees of as low as 1.58 percent of assets, downfrom the traditional 2 percent that larger funds still command.

Added to this, compliance and regulatory costs have risenbecause of new rules such as the Alternative Investment FundManagers Directive in Europe and Dodd-Frank legislation in theUnited States.

"Fee compression continues to reshape the business of hedgefunds, lowering fees even as expenses rise, all but eliminatingfee-only operating margins, and raising the level of assetsneeded 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 fundstoday. While larger firms have sucked in the bulk of new cashflooding into the industry from institutional investors, smallerfunds have struggled to raise assets.

The structure of hedge fund fees - typically an annual 2percent management charge and a 20 percent performance fee -also means bigger firms can enjoy huge revenues and absorbincreased regulatory costs even without generating positivereturns for their clients.

By contrast, until smaller funds break the $1 billion inassets mark, they will struggle to cover expenses frommanagement fees alone, the survey showed, meaning managers mustincrease assets and produce a positive performance or subsidisea loss-making business.

The situation is worse in Europe, Citi said, where companyexpenses were at least 20 percent higher than for U.S. firms andmanagers are worrying more about upcoming regulations.

The study surveyed 124 hedge fund firms representing $465billion, or 18 percent plus of total industry assets.

View Comments (0)