The hedge fund industry as well as traditional asset management is beginning to implement lower cost structures as economic uncertainty and increasing pressure from clients over fees weighs on their business. Unfortunately for hedge funds, the reality of continuing under the 2 percent plus 20 percent of returns fee structure is quickly coming to an end, as investors demand reduced rates, especially the large institutional investors that fundraisers covet.
Ongoing weak economic conditions have created years of low returns, which in turn cause investors to look for additional ways to keep their portfolios intact. One such area for risk free gains is clearly the reduction of fees. As institutional investors struggle to make minimum return hurdles for their long term obligations, portfolio managers are demanding lower fees, or they are simply moving their money elsewhere. Increased competition within the industry certainly favors the institutional investor over the hedge fund manager.
Hedge Funds Remain a Viable Alternative to Fixed Income
While the battle on fees continues, hedge funds are uniquely positioned to offer a product that is attractive to many portfolio managers. In light of historically low fixed income yields, managers are looking for alternative investments that offer low correlation to equity returns, but still provide more return than the two or three percent achievable with a low risk bond portfolio. The competitiveness, including fees, of hedge funds versus a low cost bond index portfolio remains the question at hand. Funds that can outperform fixed income benchmarks including fees may be in a stronger position to negotiate higher fees than those funds that aren’t earning returns that justify the higher management cost.
Regulatory Changes are Driving Higher Costs
While investors are demanding decreased fees, hedge funds are facing the increased cost of complying with ever more complex regulation. In the United States as well as in the European union, dramatic changes to securities regulation has increased legal and compliance costs associated with managing a fund. Unable to pass these costs on to fee-sensitive investors, funds are looking to cut elsewhere in order to maintain acceptable margins. Unfortunately, most often the cuts target fund employees.
What does this mean for those seeking Hedge Fund Industry Jobs?
While the news of cost cutting in the hedge fund industry certainly does not bode well for job seekers when taken in isolation, there are some positive signs within the industry for those looking for work. The alternative investment class in general is set to experience growth due to its unique position to offer higher returns than fixed income while maintaining low correlation to equity indexes. This should attract additional client funds.
In the short term, regulatory uncertainties and squabbles over fees may cause some firms to hold off on hiring or make slight cuts, but hedge funds are in far better condition than other segments of the financial industry, such as investment banking, for example, where hundreds of thousands of jobs are being shed. For talented and experienced individuals, opportunities will continue to present themselves among successful hedge funds, namely those that can successfully justify their fees to their client investors.