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Percent Of Industry Spend On Compensation & 3rd Party Expenses By Category & By Size Of Manager (Graphic: Business Wire)

Key findings of the survey include:

  • Managers need between $250 million and $375 million AUM in order to break even and survive off management fees alone. These firms rely heavily on third parties for key business functions. (See attached Chart I)
  • The average small hedge fund with $124 million AUM along with typical fee structures and staffing levels would have $390,636 in management fees available to pay salaries and incentives to their entire investment team, or approximately $79,250 per person.
  • Medium-sized hedge funds ($250 million to $1 billion AUM) significantly increase expenditures on operations and technology personnel while reducing third-party spending, a first step to internalizing these functions.
  • Large hedge funds controlling $1 billion to $5 billion in AUM invest in building internal investment support roles hiring in marketing, investor relations, risk and compliance; resulting in the culmination of internalization and little use of third parties in this category.
  • The largest so-called “franchise managers,” with AUM greater than $5 billion typically invest in strategies that rely on less liquid underlying assets and the majority of these firms also manage other types of long only, regulated or private equity money in addition to their hedge fund AUM, all of which results in a far greater degree of operational complexity and a significantly higher cost base.
  • Hedge fund technology spending for internal resources, hardware, software, data and third party IT is expected to finish 2012 at $2.3 billion, up 14% over 2011, led by franchise managers and large hedge funds.

The full report can be viewed at: http://icg.citi.com/transactionservices/home/demo/tutorials8/Hedge_Fund_Dec2012/

Citi, the leading global bank, has approximately 200 million customer accounts and does business in more than 160 countries and jurisdictions. Citi provides consumers, corporations, governments and institutions with a broad range of financial products and services, including consumer banking and credit, corporate and investment banking, securities brokerage, transaction services, and wealth management.

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