Key Takeaways
- • Brevan Howard, a London-based hedge fund managing $14.5 billion in its flagship fund, is waiving management fees for existing clients effective December 1, 2016, while maintaining a 20 percent performance fee—a significant capitulation in the face of investor pressure and underperformance.
- • The $2.9 trillion hedge fund industry is experiencing sustained pressure to abandon the traditional 2-and-20 fee model, with only 35 percent of funds tracked by Preqin still using the structure; average management fees have declined to 1.57 percent and performance fees to 19.29 percent.
- • Investor sentiment on fees has reached a critical threshold, with 49 percent of hedge fund clients citing fees as the most important issue for the industry and 58 percent expressing misalignment between their interests and managers' compensation.
- • Brevan Howard's Master fund declined 2.5 percent through August 2016, contributing to mounting redemptions and demonstrating the link between underperformance and fee pressure across the institutional investor base.
- • Smaller and newer hedge fund managers are increasingly using reduced fees as a competitive differentiation strategy in an increasingly crowded market.
Summary
Brevan Howard, one of the hedge fund industry's major players with $14.5 billion under management in its flagship fund, has made a significant concession to investor pressure by waiving management fees for existing clients beginning December 1, 2016. The London-based firm will continue charging a 20 percent performance fee, but the elimination of management fees represents a notable shift for a major institutional player. The fee waiver applies only to current clients and does not extend to new investors, according to CNBC's reporting.
The move arrives amid a broader industry reckoning on fee structures that has intensified due to lackluster recent performance and high-profile client redemptions. Brevan Howard's Master fund posted a 2.5 percent decline through August, underscoring the performance headwinds that have prompted institutional investors to reassess fee arrangements. This fee reduction reflects mounting pressure on the $2.9 trillion hedge fund industry to reform its controversial 2-and-20 structure—historically a 2 percent management fee plus 20 percent performance fee.
Industry data from Preqin reveals the structural shift already underway. Only 35 percent of tracked funds still employ the traditional 2-and-20 model. The average management fee across the industry has declined to 1.57 percent, while performance fees remain elevated at 19.29 percent. Newer funds have moved even lower, with average fees of 1.53 percent management and 19.13 percent performance, indicating that competitive pressures are strongest among emerging managers seeking differentiation.
Investor sentiment has solidified around fee concerns. A Preqin survey found that 49 percent of hedge fund clients identified fees as the most critical issue facing the industry over the coming year. More concerning for managers, 58 percent of clients reported doubts about fee-performance alignment, suggesting fundamental questions about value delivery. However, 58 percent also indicated conditions have "shifted in their favor," suggesting some negotiating success.
According to Preqin's head of hedge fund products Amy Bensted, the increasingly crowded hedge fund landscape is driving smaller and newer managers to use lower fees as a primary competitive lever. The combination of persistent performance pressure, elevated client redemptions, and heightened institutional scrutiny has created a structural incentive for fee compression that extends well beyond individual high-profile moves like Brevan Howard's.
The move arrives amid a broader industry reckoning on fee structures that has intensified due to lackluster recent performance and high-profile client redemptions. Brevan Howard's Master fund posted a 2.5 percent decline through August, underscoring the performance headwinds that have prompted institutional investors to reassess fee arrangements. This fee reduction reflects mounting pressure on the $2.9 trillion hedge fund industry to reform its controversial 2-and-20 structure—historically a 2 percent management fee plus 20 percent performance fee.
Industry data from Preqin reveals the structural shift already underway. Only 35 percent of tracked funds still employ the traditional 2-and-20 model. The average management fee across the industry has declined to 1.57 percent, while performance fees remain elevated at 19.29 percent. Newer funds have moved even lower, with average fees of 1.53 percent management and 19.13 percent performance, indicating that competitive pressures are strongest among emerging managers seeking differentiation.
Investor sentiment has solidified around fee concerns. A Preqin survey found that 49 percent of hedge fund clients identified fees as the most critical issue facing the industry over the coming year. More concerning for managers, 58 percent of clients reported doubts about fee-performance alignment, suggesting fundamental questions about value delivery. However, 58 percent also indicated conditions have "shifted in their favor," suggesting some negotiating success.
According to Preqin's head of hedge fund products Amy Bensted, the increasingly crowded hedge fund landscape is driving smaller and newer managers to use lower fees as a primary competitive lever. The combination of persistent performance pressure, elevated client redemptions, and heightened institutional scrutiny has created a structural incentive for fee compression that extends well beyond individual high-profile moves like Brevan Howard's.
Go deeper than the headline
Research every firm in this story, track the ones that matter and get the daily briefing — free for 7 days.