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Digital Subscriptions > The Hedge Fund Journal > Issue 142 – Aug 2019 > In Harmony

In Harmony

How hedge funds and investors continue to strike the right note in aligning their interests

Foreword

We are pleased to present AIMA’s latest research, ‘In Harmony – how hedge funds and investors continue to strike the right note in aligning their interests’. Three years after the ‘In Concert’ paper was published, this new research paper builds on those findings. It examines to what extent these trends are continuing, as well as identifying how hedge funds and investors are aligning interests that best meet their mutual needs.

Assets under management for the hedge fund industry continue to break new records, as it attracts an increasing number of institutional investors. Their views and expectations of hedge funds have brought about significant changes impacting the overall industry. In the simplest terms, this revolution centres on three Cs – customisation, collaboration and communication.

The industry’s institutional, experienced and sophisticated investor base has driven the change towards bespoke investment mandates, value advisory services – and deeper partnerships that now create a closer alignment of investors’ and hedge-fund managers’ interests.1 A global committee comprising hedge-fund managers, consultants and representatives from the academic community. It produces and endorses research and thought leadership on all aspects of the hedge fund business model.2 Members of this global committee represent pension fund managers, sovereign wealth funds, endowments, foundations, large family offices, and private banking platforms.

Our analysis reveals that investors and managers are exploring new approaches to negotiate fees and fund terms, and that hurdle rates are more widespread. The widespread use of the ‘2 and 20’ compensation model is now consigned to the past and we have observed increased use of ‘tiered fees’ for investors.

A new equilibrium in the alignment of interests is on the horizon.

Customisation and co-investing mean hedge-fund managers can now deliver solutions that meet their investors’ specific risk and return goals. This trend has been accompanied by a recognition of the value of accurate and informed communication between investor and manager, allowing for a productive exchange of knowledge between both parties and an increased understanding of investment strategies by investors.

We would like to thank AIMA’s research committee1 and the representatives of AIMA’s global investor steering committee2 for their valuable input and for taking the time to discuss these findings. We would also like to thank the various managers who provided the number of testimonials included throughout this paper.

Finally, we thank you for your time in reading this paper.

Jonathan Waterman,

National Asset Management Leader, RSM US

Tom Kehoe,

Global Head Of Research and Communications, AIMA

Executive Summary

The findings from this year’s survey are based not only on what is current practice between hedge funds and investors, but also potential future developments and how these could be best implemented. Below are the six key takeaways that emerged from this year’s survey:

1. Moving towards a new equilibrium

There is an increasing sense that fund fees and terms between hedge-fund managers and their investors are moving towards a new normal. No longer is the focus solely on fees, rather investors and hedge funds are continuously exploring new ways to negotiate fees and fund terms to reflect a better alignment of interest. Managers are responding to investors’ needs by putting in place arrangements that are more closely aligned both to the requirements of the client and the underlying investment strategy. Fund hurdle rates continue to grow in popularity. Almost 40% of all respondents use fund hurdle rates of varying description, including a pre-agreed alpha hurdle rate, used by 14% of the total number of respondents.

2. Beyond 2 and 20

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Informing the Hedge Fund Community. With access to some of the industry’s biggest names and an astute and talented group of writers and contributors, The Hedge Fund Journal has established itself as a trusted source of information on the hedge fund industry.