AIMA/GPP Hedge Fund Survey: Breakeven AUM Lower Than Often Thought

Jul 6 2017 | 7:06pm ET

Contrary to conventional wisdom, most alternative investment management firms are able to turn a profit and expand with considerably less than $100 million in assets under management, according to a new survey of sub-$500 million managers by the Alternative Investment Management Association (AIMA) and boutique prime brokerage company GPP.

The joint survey of 135 global alternative asset managers found that the average break-even point is around $86 million in AUM, while around 30% are able to break even with $50 million in assets or less. 

Interestingly, break-even was found to be highest among global macro hedge funds - and average of $132 million in AUM - and the lowest for alternative credit fund managers, at  $77 million in AUM.

The new research sheds new light on the impact of broader trends and themes on this segment of the industry, AIMA said in a statement, such as fee pressures, post-crisis regulatory impact, alignment of interest demands, and the optimum mix between dedicated in-house staff and out-sourced resources.

In terms of management fees, about half said they are charging 1.5% or less. For hedge fund start-up businesses, management fees were found to be around 1.25% on average. In terms of performance fees, about two-thirds of the smaller managers said they are charging less than 20%; 77% expect performance fees to remain unchanged over the next year, while 11% expect a decrease and 12% expect an increase.

Methods of aligning interests between smaller managers and fund investors were found to be growing. Close to 90% of respondents said they have a high water mark, while roughly one in three has a hurdle rate. And while less common, 8% of smaller managers said their flagship fund provides fee clawbacks to investors under certain conditions.

The costs of regulation continue to weigh on smaller firms. Almost 90% of respondents to the survey said they allocate up to one-fifth of their total expenditure to compliance, with this number expected to increase when firms adhere to MiFID II. Legal services were found to be the most outsourced function, with only 16% filling this role internally, while COO, marketing/IR, risk and compliance functions were found to be more likely to be filled by in-house roles.

“Our research disproves the notion that only relatively large, institutionalized businesses can succeed in the modern hedge fund industry,” said AIMA Chief Executive Jack Inglis in the statement. “Firms can build strong, sustainable and growing businesses with considerably less than $100 million in assets [under management]. This is good news not only for the future health and well-being of the sector, but for investors too, since smaller managers have often been the source of many of the industry’s greatest innovations.”

“We believe this is the first comprehensive survey of the next generation of hedge fund managers,” added GPP head of prime brokerage Sean Capstick. “Although this group represents two-thirds of the number of funds in the hedge fund universe, their voice is rarely heard. This group is the incubator for tomorrow’s ‘billion-dollar club’ and our findings show them to be in good health, definitely alive and kicking."

The full report is available on AIMA’s website. 

Co-founder of the well-known Chartered Alternative Investment Analyst designation, AIMA is the global representative of the alternative investment industry, with more than 1,800 corporate members in over 50 countries. AIMA’s fund manager members collectively manage more than $1.8 trillion in assets, and its Alternative Credit Council represents more than 80 members managing $300 billion of private credit assets globally.   

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