As a portion of hedge fund fees are traditionally based on the total value of assets under management (AUM), consistent growth in industry AUM has benefited the Hedge Funds industry immensely over the five-year period, according to the available data from KPMG and the Center for Hedge Fund Research at Imperial College London.
The report indicates that the significant annualized return offered by hedge funds from 1994 to 2011 has exceeded the performance of equities, bonds and commodities over the same period.
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Moreover, in 2013, industry AUM surged, largely as a result of the continued satisfaction of institutional investors with respect to the performance of hedge funds. Consequently, industry revenue is anticipated to increase at a healthy annualized rate from 2009 to 2014; this growth includes a rise in revenue expected in 2014 alone.
However, the industry’s lackluster performance compared to its traditional benchmarks in recent years has drawn a considerable amount of criticism. According to Bloomberg, the return garnered from the S&P 500 index exceeded the industry’s return in 2013.
Stephen Hoopes, industry analyst, IBISWorld, said: "the last time the industry outperformed US equities was in 2008, when the industry’s loss failed to reach the S&P 500’s sharp decline."
While a number of industry professionals question the relevance of benchmarking hedge fund returns against equity performance, given that hedge funds rely on a range of instruments other than stocks,
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By GlobalDataHoopes added: "the industry’s recent poor performance has dampened its traditional fee structure."
As a result, the industry’s typical "2.0 and 20.0" structure of a flat fee on total AUM and a right to earned profit has deteriorated into a "1.4 and 17.0" arrangement.
Market share concentration in the Hedge Funds industry is low. Over the five years to 2019, industry revenue is forecast to increase at an annualized rate. Industry AUM are forecast to continue to increase at a consistent rate, partially due to diversification benefits that hedge funds provide.
However, increased regulation stemming from the global financial crisis and an escalating focus on the industry’s tax structure have the potential to harm the industry’s profit margins in the years to come. Regardless, the number of new hedge funds is forecast to trend with AUM and revenue over the five-year period, as new entrants are not expected to be discouraged by increasing compliance costs.
