The majority of alternative investment management firms are able to build sustainable businesses, turn a profit and expand with less than $100 million in assets, according to the study conducted by the Alternative Investment Management Association (AIMA).
The survey, which looked at the sub-$500 million firms and examined 135 alternative asset manager globally, found that the average break-even point was around $86 million, with around a third of hedge funds being able to break even with $50 million in assets or even less.
The study, which also discussed the impact of broader trends, such as free pressure, post-crisis regulation and greater alignment of interests on the industry, showed that around half of the respondents said that they charged 1.5 per cent or less for the management fees, with hedge fund start-up businesses charging 1.25 per cent on average.
As far as performance fees were concerned, the study confirmed that around two thirds of smaller managers charged less than 20 per cent and three quarters expected performance fees to remain unchanged over the next year.
The methods of aligning interests between smaller managers and fund managers were found to be growing, with 90 per cent of funds saying they had a peak value above which performance fees could be charged.
The study also found that 80 per cent of smaller hedge funds were planning to increase their headcount over the next 12 months and that the costs of regulation continued to weigh on the firms, with on average one fifth of the respondents’ total expenditure being allocated to compliance.
At the same time, legal services were found to be the most outsourced function, while marketing, risk and compliance functions were found to be more likely to be filled by in-house roles.
AIMA’s chief executive, Jack Inglis, said: “Our research disproves the notion that only relatively large, institutionalised businesses can succeed in the modern hedge fund industry”.
“We have found that firms can build strong, sustainable and growing businesses with considerably less than $100 million in assets.
“This is good news not only for the future health and well-being of the sector but for investors too, since smaller managers have often been the source of many of the industry’s greatest innovations,” he said.
