Alternative asset managers are changing their business models and exploring a broader set of arrangements designed to improve the alignment of interest between themselves and their investors, according to a new survey by the Alternative Investment Management Association (AIMA), the global representative for alternative asset managers.
The study, titled “In Concert”, is the most extensive undertaken by AIMA into the design of manager remuneration, investment terms and other methods of deepening the relationship with investors.
AIMA CEO Jack Inglis said: “Managers want to build sustainable businesses and investors want the right kind of performance at a fair price. These are the interests that are being ever more closely aligned.”
The report identifies emerging trends, such as the growing prevalence of “claw backs”, whereby a share of past performance fees are returned to investors during loss-making periods, as well as quantifying longer established practices including “skin in the game”, with managers investing their own personal capital alongside their investors’.
The study finds that these and other beneficial terms often can be obtained by investors in return for agreeing to lock up their capital for longer.
Among the findings:
• One-in-three managers now charge performance fees above a hurdle rate, such as a fixed percentage or an index-based benchmark
• Three-quarters (77%) of managers offer or are considering offering a sliding fee scale, whereby management fees are reduced as the fund raises assets above particular thresholds
• Almost all (97%) managers charge performance fees only above a high watermark – the fund’s highest previous value
• Although not widespread, more fund managers are offering claw backs, whereby a share of past performance fees are returned to investors during loss-making periods
• Longer lock-ups in exchange for lower fees and other beneficial terms are increasingly common
• The majority of managers now agree to calculate and charge performance fees annually, rather than throughout the year, such as when profitable positions are closed out
• In firms where staff invest their own capital in the fund, nearly 30% said that principals and employees were the source of more than 10% of the fund’s total assets under management
• Nearly two-thirds (61%) of managers consider that having a significant personal investment in the fund is the single most important method for aligning interest with their investors
• Around half of managers (48%) offer or are considering offering co-investment to their investors, via either a particular investment opportunity or jointly-managed fund
• Disclosure of data has increased substantially since the financial crisis, and investors are given greater access to portfolio managers
AIMA CEO Jack Inglis added: “Hedge funds and other categories of alternative investment funds have, for decades, offered close alignment of interest with their investors. Performance fees charged only above a high watermark and ‘skin-in-the-game’ are decades-old concepts and have helped hedge funds in particular to raise capital from institutional investors. But what our survey shows is that managers now have a much larger array of tools at their disposal and are able to create ever closer and more tailored alignment. This trend helps to explain why, with only isolated exceptions, pensions and other investors have remained loyal to hedge funds in recent years.”
The survey of 120 alternative investment fund management firms has been sponsored by RSM, a provider of audit, tax and consulting services focused on the middle market.
“Institutional investor demands have brought about significant changes that affect the overall industry,” said Alan Alzfan, hedge fund practice leader with RSM US LLP (“RSM”). “In a highly competitive environment for the asset management industry, this survey provides keen insight on how hedge fund managers continue to take the lead in finding solutions that drive growth and innovation and add value to their investors.”
The survey was overseen by AIMA’s Research Committee, which comprises executives at fund managers and service providers, and was reviewed by the AIMA Investor Steering Committee, whose members represent pension fund managers, endowments, foundations, large family offices and sovereign wealth funds. The findings build on “The Extra Mile”, a 2014 paper by AIMA and Barclays into the growing prevalence of partnerships between alternative investment funds and institutional investors.