It takes at least $250 million in assets for a hedge fund to be self-sustaining on its management fees alone, while the largest hedge fund firms incur significant additional costs due to complexity and size, according to the first global survey of the costs of establishing and managing a hedge fund business.
The report, 2012 Hedge Fund Business Expense Survey , was conducted by Citi Prime Finance to shed light on business expenses involved in running a hedge fund, and to provide benchmarks for hedge fund executives as well as for investors conducting due diligence into how managers run their organizations.
The survey captured data from funds based in North America, Europe and Asia and found that hedge fund manager expenditures on support personnel and third-party expenses totaled $14.1 billion in 2012, the equivalent of 65 basis points of total industry assets. These expenses include marketing, investor relations, risk and compliance, operations and technology, and business management, but do not include compensation costs for investment management personnel. Citi Prime Finance surveyed more than 80 hedge fund firms representing $186 billion in assets under management (AUM), 8.5% of total industry assets.
“The cost of running an operationally sustainable hedge fund is substantial,” said Alan Pace, Global Head of Sales and Client Experience for Citi Prime Finance. “Hedge fund management firms of all sizes and lifecycle stages need to pay close attention to business expenses to the benefit of their firms and their investors.”Sandy Kaul, US Head of Business Advisory Services for Citi Prime Finance: “This ground-breaking survey shows that smaller managers with assets under $250 million, which represent some 80% of all hedge funds and a quarter of total industry assets, are hard pressed to survive on management fees alone without capital injections from partners or incentive fees. At the same time, the very largest managers, about 1 percent of the hedge fund universe controlling some 60% of total industry assets, face steep costs due to diversified and complex portfolios.”