22^nd February 2023

• The definitive form of alignment between hedge fund managers and investors remains skin in the game with over 90% of fund managers surveyed investing their own monies into their funds with the average investment standing at 8% of AUM. Investors are keen to see broader fund investment extending beyond principals own investment to include other highly skilled executives in the fund.
• The combination of higher costs and a plateauing of industry headline fees has prompted hedge fund firms to innovate how they charge fees and manage expenses by applying new solutions underpinned by a variety of relationship pricing that reflect changing needs of the fund manager and their clients.
• The importance of co-investment vehicles is a significant development from the findings of the 2019 ‘In Harmony’ survey. Over 90% of investors either engage in this type of partnership or are seeking to do so. Equally, over half of the fund managers are currently utilising a co-investment vehicle with an investor or are open to doing so.

The Alternative Investment Management Association (AIMA), in partnership with RSM International, has published new research into the evolving relationships of fund managers and their investors to investigate to what extent they align interests for mutual benefit.

The report ‘In Sync: How hedge funds achieve alignment with investors to foster long-term strategic partnerships’ outlines the ways fund managers are adapting their business model in response to competition and the evolving mandates of investors.

The report builds on AIMA’s 2019 report ‘In Harmony’ which examined the same manager-investor dynamic, including a time-series analysis of how trends have changed.

The purest form of alignment between fund managers and investors remains skin in the game that principals have in their funds. This report demonstrates that this approach is now expanding to include highly skilled investment executives to ensure they remain focused on delivering for their investors as well as dissuading them from exiting the fund amid the increasing war for talent across the industry.

Investors are increasingly making a high level of transparency around fees and expenses a prerequisite to any allocation. In both the manager and investor surveys that inform this report, 70% of these respondent pools cited greater transparency as the best way to improve alignment.

Fund managers and investors continue to explore more equitable compensation arrangements which meet their expectations. In addition to hurdle rates becoming more popular, the modern fee model is underpinned by a variety of relationship pricing, lock-ups, and other value service offerings.

The research revealed that larger fund managers (those with more than US$1 billion in assets under management) are consistently more likely to employ some or all these features to offer greater flexibility to investors, thereby offering a roadmap to smaller funds looking to scale and understand the needs of institutional investors.

Among these options, the use of tiered fees has become more popular. Most fund managers (70%) offer preferential fees compared to only a third that said they did so last time. For managers, a larger management fee can help to meet the operating costs of a business. For investors, tiered pricing allows them to share in the economies of scale as a fund’s assets grow.

Finally, responsible investment has entered a new phase. The macroeconomic headwinds of the moment demand a more nuanced ESG strategy that transcends binary exclusion lists and is only applied where relevant.

When asked about the challenges to making ESG-oriented investments, just over half (52%) of fund managers said it wasn’t relevant to their mandate, with a further third (34%) saying they lacked sufficient data.

Methodology

The report is informed by two global market surveys. One of 138 alternative investment managers with an estimated aggregate of US$707 billion in assets under management. The other includes the views of 35 institutional investors that allocate to alternative investment funds.

Tom Kehoe, Global Head of Research and Communications at AIMA, said: “This report represents our latest exploration into the manager-investor dynamic that underpins hedge funds. We find that the evolving relationship has brought about significant changes that impact the overall industry since we last reviewed this relationship in 2019. Through more flexible fee models, new products, value advisory services, as well as greater transparency and knowledge sharing, our analysis reveals a more strategic partnership that results in a deeper alignment of interests between both parties.”

Jonathan Waterman, National Asset Management Leader at RSM US LLP, said: “We couldn’t be more excited to present ‘In Sync,’ which is our third publication collaborating with AIMA on trends in the asset management industry. While some metrics are similar to our prior publication results in 2016 and 2019, certain trends have formed that show how much the industry has evolved over the past nine years, especially coming out of the pandemic.”

Tessie Shih, Director of Investor Relations at CFM and Chair of AIMA’s Research Committee, added: “This report offers a timely update on how fund managers are adapting their offering to best align their interests with those of their investors in today’s fluid market environment. For fund managers, the alternative investment space is more competitive than ever when it comes to securing allocations from investors and it is important to employ a wide range of tools to stay ahead.

“This report covers everything from fee models to transparency and knowledge-sharing best practices, through to ESG and bespoke products. At its core, both the data and the case studies presented in the report reinforce the point that a successful manager-investor relationship must be viewed as a close partnership where both parties are progressing in the same direction for mutual gain.”

Media contacts

AIMA

Drew Nicol
Associate Director, Research and Communications
[email protected]

RSM

Caroline Docherty
[email protected]

About AIMA

The Alternative Investment Management Association (AIMA) is the global representative of the alternative investment industry, with around 2,100 corporate members in over 60 countries. AIMA’s fund manager members collectively manage more than US$2.5 trillion in hedge fund and private credit assets.

AIMA draws upon the expertise and diversity of its membership to provide leadership in industry initiatives such as advocacy, policy and regulatory engagement, educational programmes and sound practice guides. AIMA works to raise media and public awareness of the value of the industry.

AIMA set up the Alternative Credit Council (ACC) to help firms focused in the private credit and direct lending space. The ACC currently represents over 250 members that manage US$600 billion of private credit assets globally.  

AIMA is committed to developing skills and education standards and is a co-founder of the Chartered Alternative Investment Analyst designation (CAIA) – the first and only specialised educational standard for alternative investment specialists. AIMA is governed by its Council (Board of Directors).

For more information visit aima.org.

About RSM

RSM is the leading provider of professional services to the middle market. As the sixth largest global network of independent assurance, tax and consulting firms, RSM operates in 120 countries, across 830 offices, with more than 57,000 people internationally.

The Network’s global revenues are US $8 billion. As an integrated team, RSM shares skills, insight and resources, as well as a client-centric approach that’s based on a deep understanding of its clients’ businesses. This is how RSM fulfils its purpose to instill confidence in a world of change, empowering its clients and people to realise their full potential. 

RSM is a member of the Forum of Firms, with the shared objective to promote consistent and high-quality standards of financial and auditing practices worldwide. RSM is the brand used by a network of independent accounting and advisory firms each of which practices in its own right.

RSM International Limited does not itself provide any accounting and advisory services. Member firms are driven by a common vision of providing high quality professional services, both in their domestic markets and in serving the international professional service needs of their client base.

 For more information, visit rsm.global.