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Net Net: Promoting innovation and managing change

Hedge fund investors want fees lowered

Is hedge fund pain your gain?

Hedge fund managers may have to face some upheaval in their industry this year.

After years of subpar returns, industry members are girding for a rough go of it in 2016, with the possible exodus of investor cash and a re-examination of the traditional 2-and-20 fee structure paramount among the changes.

That's according to a survey hedge fund analyst Preqin conducted of more than 500 managers, who indicated a number of concerns. As an industry, hedge funds lost about 1 percent in 2015, just the fourth losing calendar year since 1990, according to HFR, though the industry has a less favorable record when compared to broad stock market averages.

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Despite the underperformance, the $2.9 trillion space has continued to attract investor cash. Current assets under management have risen 81 percent since the market lows of 2009. Still, managers fear the tide could begin to turn.

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"Hedge funds have had a second year in which performance has disappointed a large number of investors," Preqin said in the survey. "These concerns have led to signs that fundraising could become extremely challenging in 2016; more investors have indicated that they intend to invest less capital in 2016 than in 2015."

The survey found that 65 percent of investors — primarily institutions and high net worth clients — will be allocating less than $50 million in 2016, an increase from 54 percent in 2015. Those planning to invest more than $250 million also contracted, from 15 percent in 2015 to just 8 percent this year.

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Fee structure also is expected to come into play.

For most of its existence, the industry has fed off the 2-and-20 model — that is, 2 percent of assets and 20 percent of return — that has come under sharp criticism. Preqin survey respondents noted that positive changes had been made on fees, but that more work needs to be done.

Of conditions investors want to see improved, 46 percent of investors cited fees. While 35 percent said the structure had improved, 42 percent said fees need to be reduced more.

"This indicates that while there has been continued movement in the right direction regarding the level of management and performance fees, there remains clear demand for further improvements over 2016," Preqin said.