Hedge Fund Managers Need At Least $250 Million Of AuM To Break Even - Citi

Eliane Chavagnon

14 December 2012

Hedge fund managers need between $250 and $375 million in assets to "break even" and survive off management fees alone, while the largest hedge fund firms incur significant additional costs due to complexity and size, new data shows.

The report, 2012 Hedge Fund Business Expense Survey, was conducted byCiti Prime Finance and covered over 80 hedge funds across North America, Europe and Asia. The hedge funds represented $186 billion in assets under management and 8.5 per cent of total industry assets.

According to the survey, this year manager expenditures on support personnel and third-party expenses totalled $14.1 billion. Such expenses include marketing, investor relations, risk and compliance, operations and technology, and business management. They do not, however, include compensation costs for investment management personnel.

Sandy Kaul, US head of business advisory services at Citi Prime Finance, said smaller managers with assets under $250 million are "hard pressed" to survive on management fees alone without capital injections from partners or incentive fees. This segment represents some 80 per cent of all hedge funds and a quarter of total industry assets, he noted.

Meanwhile, the "very largest managers" - accounting for about 1 per cent of the hedge fund universe - control approximately 60 per cent of total industry assets but face "steep costs" due to diversified and complex portfolios.

Other key findings from the survey include:

• The average small hedge fund with assets of $124 million in AuM - 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 - approximately $79,250 per person.

• Medium-sized hedge funds (between $250 million and $1 billion) "significantly increase" expenditures on operations and technology personnel, while reducing third-party spending. The firm descirbes this as a "first step" to internalising those functions.

• Large hedge funds with between $1 billion and $5 billion invest in building internal investment support roles, hiring in marketing, investor relations, risk and compliance. This results in the "culmination of internalization" and "little use" of third parties, the firm said.

• The largest so-called "franchise managers" with over $5 billion typically invest in strategies that rely on less liquid underlying assets. The majority 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".

Meanwhile, hedge fund technology spending for internal resources, hardware, software, data and third-party IT is expected to finish 2012 at $2.3 billion. This is up 14 per cent over 2011 and led by franchise managers and large hedge funds, the firm said.