Hedge Fund Business Expenses Exceed $14 Billion Globally: Citi Prime Finance Survey
Survey Shows Funds Need at Least $250 Million in AUM to Breakeven; Largest "Franchise" Firms Carry Exceptionally High Costs
Spending on Technology Up 14% in 2012
NEW YORK--(BUSINESS WIRE)-- 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."
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:
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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Scott Helfman, +1-212-816-9241
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