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Aon Retirement and Investment Blog

Hedge Fund Fees are Falling!

Fees Are Falling! 

Chicken Little’s prediction aside, there does seem to be a developing trend towards more rational (lower) fees across a variety of hedge funds. Nearly every other week we hear of a manager offering their investors fee discounts, albeit often with reduced liquidity terms. These reductions are generally driven by a variety of market pressures but the recent difficult investment environment for many hedge fund strategies has certainly been a factor in the reductions.

The average fees on three of the HFRI hedge fund indices from the beginning of 2016 to 2018 confirms this trend is real and slowly taking hold. We see reductions in the average management fee across several hundred funds ranging from 3bp to 11bp.

Performance fee reductions are less common than management fee discounts. Because performance fees work to align incentives and are contingent on positive returns we generally prefer to see the discounts come through the fixed management fee. The fees for Aon’s Buy rated funds are falling even more than the HFRI indices.

These Aon fee reductions are larger than those for the HFRI indices because we have been actively “helping them along. Of the 29 new hedge funds added to our Buy list last year, 12 of them offered Aon related investors a discount of 49bp on average. We secured these fee discounts without reducing the liquidity of our investments by leveraging our collective size and capitalizing on the fact that our clients tend to be viewed as preferred investors.

The fact that we were able to obtain fee discounts at over 40% of the newly Buy rated managers is reflective of the reality that it is easier to negotiate discounts before making an investment. That said, it is still worthwhile for investors to review their fee arrangements periodically and discuss fees with any manager that seems off market. Large or long lasting investments may also warrant a fee discount.  Please consult your Aon Hewitt consultant for additional guidance on this process and also see our recent white paper Making Portfolios More Fee Efficient.

The fee information presented reflects estimated management fees and excludes any operations or other expenses the client may incur, potential savings which may or may not be achieved. Actual fees and expenses may differ from those presented based on other fees and expenses you may incur as a client. The investment management fees presented above are based on the rate AHIC is able to obtain based on the firm’s volume of assets, and may not be available to individual plan agreements. There is no guarantee that the projected estimated savings will be achieved.
Index Definitions:
HFRI Fund Weighted Composite Index – Equal weighted peer group of self reported returns of hedge funds to Hedge Fund Research
HFRI Equity Hedge Index – Equal weighted peer group of self reported returns of hedge funds with hedged equity investment strategies
HFRI Event Driven Index – Equal weighted peer group of self reported returns of hedge funds employing an event driven investment strategy
HFRI Macro Index – Equal weighted peer group of self reported returns of hedge funds employing macroeconomic investment strategies
HFRI Distressed/Restructuring Index – Equal weighted peer group of self reported returns of hedge funds employing distressed and restructuring oriented investment strategies
HFRI Relative Value Index – Equal weighted peer group of self reported returns of hedge funds employing relative value investment strategies
The information contained above should be regarded as general information only. That is, your personal objectives, needs or financial situation were not taken into account when preparing this information. Accordingly, you should consider the appropriateness of acting on this information, particularly in the context of your own objectives, financial situation and needs. Nothing in this document should be treated as an authoritative statement of the law on any particular issue or specific case. Use of, or reliance upon any information in this post is at your sole discretion. It should not be construed as legal, tax or investment advice. Please consult with your independent professional for any such advice. The information contained within this blog is given as of the date indicated and does not intend to give information as of any other date. The delivery at any time shall not, under any circumstances, create any implication that there has been a change in the information since the date of publication, or any obligation to update or provide amendments after the original publication date. The blog content is intended for professional investors only.

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