The Changing Fund Manager Landscape and Assessing Fund Sustainability
Hedge funds, private equity firms, family offices, and other less flashy fund managers have found themselves under pressure from the very clients they aim to serve. It turns out that seeking alpha is both challenging and expensive. Some state pension plans have announced that they will reduce allocations to underperforming and high priced sub-advisors, while others, like the Teachers Retirement System of Texas have proposed a new fee structure that would ultimately cap fees for its sub-advisors. The result could be slimmer margins for fund managers and a greater focus on operating costs.
The traditional fee structure associated with hedge funds is the 2 and 20 model, which charges investors a 2% fee on assets under management (AUM) as well as 20% of returns over its hurdle rate. New fee structures like the model proposed by the Teachers Retirement System of Texas could reduce overall fund manager fees.
Assessing a Fund’s Sustainability
TRA has already reviewed fund managers setting up shop under new reduced fee regimes. To be clear, the pressure on fund manager fees does not foreshadow the end of the hedge fund or private equity industries, but it does require a more nuanced understanding of a fund’s structure to determine its long-term sustainability. We explore several key fund aspects, including AUM, commitments, fund expiration, lock-up periods, operating history, and the number of investors. Reach out to us to learn how we can help you evaluate the risk and adequately securitize any exposure to fund managers.