Fig.6 Hedge funds


Which types of expenses do you currently pass or intend to pass through to your flagship fund?


Hedge funds


For any of you offerings, have you negotiated a cap on expense ratios with any of your investors? If not, are you willing to negotiate a cap on expense ratios


Regulatory registration and compliance for the fund


Research Research-related travel Outsourcing of


back office shadowing Outsourcing of


middle office compensation


Middle and back office personnel compensation


Regulatory registration and compliance for the advisor


Non-trader executive compensation Trader compensation 41% 28% 27% 22% 10% 7% 3% 7% 6% 1% 3% 1% 2%


Have negotiated Willing to negotiate Have not negotiated and unwilling to negotiate


59% 3% 55% 17% 2% 28%


Currently pass through Intend to pass through


“When we are deciding which manager to allocate to, we look for the type of portfolio they can put forward for us, how it can be tailored to our needs, governance, transparency and the returns they expect to generate.” (PENSION PLAN, EUROPE)


entertain concessions to the incentive such as imposing minimum hurdle rates, tiering of incentive rates, reinvestment of incentives and/or crystallisation periods longer than a year.


Passing expenses through to the funds has reached its limit In the past, a lever managers could pull in response to increasing expenses was to pass through certain costs to the funds. However, few managers expect to pass through more expenses to the funds going forward. This is partially in response to regulatory scrutiny, but more directly related to the fact that investors have been laser focused on individual types of expenses they are bearing in addition to the overall expense ratios of their funds.


Not surprisingly, the smallest managers have fewer pass-through options and in almost all categories


were bearing a substantially greater portion of the expenses as compared to their mid-size and larger peers. This cycle exacerbates the struggles that new managers have in successfully launching their businesses.


As further evidence of how far this dynamic has swung, nearly 30% of managers have negotiated caps on expense ratios and a further 17% say they would be willing to. This negotiation allows investors to fi x the amount of expenses they will incur at an acceptable threshold while forcing the managers to further focus on managing their costs.


While the costs highlighted here are certainly not new, or surprising, for any manager or investor, the regulatory environment continues to prompt a number of new direct and indirect costs to the industry. THFJ


51


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