Barclays recently sent a note to clients in which it highlighted that the expense fee charged by multi-manager hedge funds is triple the amount of their traditional peers.
This is a sign of just how high a price tag is in the case of these funds because they are able to offer consistently high returns to their clients.
The report was aimed at shedding light on the complicated and opaque sector of finance where it is possible to make big returns using public money, such as pension schemes, but the cost is also higher.
Multi-manager hedge have offered an average return of 8.3% in the last five years, which has seen them outperform the wider industry that offered average returns of 5.5%.
According to industry sources, as these companies were outperforming the sector, investors were willing to pay higher fees.
It should also be noted that these fees are not fixed and can increase because they depend on the performance of the traders that work with the hedge funds.
There is a 2% fixed cost fee associated with traditional hedge funds and 20% of the profit goes to the owner of the hedge funds after costs.
In the case of multi-manager hedge funds, they have to give the traders working for them bonuses due to which they charge higher expense fees.
The prominent names
The cost of the hedge funds comprises these variable bonus payments. Therefore, rather than the traditional ‘2-and-20’ charge, the cost of multi-manager hedge funds is likely to be ‘7-and-20’.
According to public filings and investors, a multi-manager hedge fund model is used by prominent hedge funds, such as Balyasny Asset Management, Millennium Management, and Citadel.
Barclays found a total of 42 multi-manager hedge funds, two-thirds of which are based in the United States and are collectively managing assets of more than $290 billion.
The fund’s success is irrelevant when it comes to charging expenses related to performance. Sources have revealed that if one trader performs well, but the fund loses money, investors still have to pay for the bonus of that one person.
The sources said that investors go after these funds because they are able to generate consistent returns.
They may have to deal with higher costs, but the final amount they get at the end of the day is also higher than most of the other hedge funds.
An industry source revealed that the Wellington Fund, which is part of the multi-manager fund of Citadel, has been offering a 20% annualized return since it began in 1990.
Since 2016, multi-manager hedge funds have seen the assets under management double and this includes some of the largest hedge funds in the world.
Investors are willing to pay higher fees because it has become the new norm. As long as the funds continue to outperform the traditional ones, they would remain invested because they get higher returns.