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In: Business and Management

Submitted By balotomz
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. Performance
Hedge fund performance has been awful in recent years. For the sixth year in a row, the Hedge Fund Index did worse than the S&P 500 stock index. Performance-wise 2014 was the worst year since 2011, with the HFRI Fund Weighted Composite Index gain of 3.6 percent for 2014, below the long term average hedge fund industry performance of +10.7 percent. And this is much below 11.4 percent gain in S&P 500 in 2014. As much of the criticism hedge funds over recent years are focused on their relative performance to S&P 500, the investors need to be educated why S&P 500 is less relevant benchmark for the Hedge Fund industry. It needs to be explained that the basic objective of Hedge Funds is to provide risk adjusted return. Hedge Funds are not specifically designed to outperform rising markets; rather they protect their investments more in a volatile and falling market. Investors’ perception needs to be changed.
2. Fees
The prevailing “2 and 20” fee structure is under attack from investors. Hedge funds typically charge a 2 percent annual management fee on assets plus 20 percent of any gain; whereas leading Index Funds such as the Vanguard 500 charges a scant 0.17 percent a year. This is putting pressure on hedge funds to revise the fees closure to their performance compared to benchmark. Investors are questioning validity of asking 20% of gains, regardless of whether the gains are the result of the fund manager’s performance or simply a rising market. They are now reluctant to pay for beta, the overall market performance. The Fund managers should get a share for the alpha only, gains they are responsible for. Investors are bargaining more aggressively on 2% Management fees also. They claim that Management fees should cover only costs and not be a source of profit. As a result the fees have started declining. Preqin, a leading source of data...

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