Hedge funds with a three-year track record of positive returns each month charge an average performance fee of 19.50%, finds data from Preqin. And funds with positive performance in less than a quarter of the months charge an average performance fee of 16.67%.

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“In a competitive fundraising climate, 58% of investors have seen reductions in performance fees over the past year,” says Amy Bensted, head of hedge funds products at Preqin. “Despite this trend, some funds are charging performance fees above the industry standard of 20% and have been successful at gaining institutional investment.”

She adds, “Indeed, the funds with the highest performance fees have been the best at producing consistent long-term absolute net returns for their investors. This suggests investors are satisfied to pay higher compensations to those managers that have produced strong performance.”

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Additional findings include:

  • Funds with fees over 20% have also produced the strongest risk adjusted net returns – with a Sharpe-ratio (2%) of 2.11 over a three-year period (compared to 1.18 of funds with a performance fee of 20%);
  • The proportion of investors that believe fund manager and investor interests are properly aligned at present has fallen to 64%, compared to 74% in 2012;
  • Management and performance fees are most commonly cited by investors as the area of fund terms where further improvements are necessary: 55% of investors are seeking reductions in both;
  • 57% of investors are now looking to negotiate fund terms and conditions, an increase from 46% in 2012. Of those investors that entered into negotiations, 81% were successful;
  • 49% of investors are seeking managers to change how performance fees are charged, for instance to make the use of hurdle rates or clawbacks more widespread across the industry; and
  • 68% of funds that charge fees in excess of 20% use hurdle rates, compared to 39% of funds that charge performance fees of 20%, and 51% of funds that charge less than 20%.

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Bensted adds, “The funds with the highest fees have also shown to offer other concessions to investor demands by showing greater use of hurdle rates which must be met before performance incentives are charged.”