Investors Willing To Pay Extra To Open Hedge Fund Doors

by Phillip Morton, Investors Offshore.com

19 October 2004

With wealthy investors ever more willing to jump onto the increasingly popular hedge fund bandwagon, reports suggest that demand is beginning to outrun supply in the alternative funds sector, forcing many would-be investors to employ middle men in an attempt to get on board some of the better performing hedge funds.

According to Reuters, examples of firms who have stopped taking money from new investors include Elliot Management Corp. which manages around $4 billion and delivered first half returns of almost 7%, and Cerebrus Capital Management, a $3.5 billion fund which returned around 6% in the first six months.

George Van, chairman of hedge fund consultants Van Hedge observed: "There is so much demand in this environment, but limited supply, and many good funds are closing to new investors at an unprecedented rate."

For many hedge funds, it seems that having too much cash at one’s disposal creates problems of its own.

"When you grow too big, you've got to put some of the money into your second-best ideas and often they don't deliver the kind of returns you want,” a New York-based fund manager told Reuters.

However, this doesn’t appear to be deterring many determined investors who are willing to pay an extra layer of fees just to get a foot in the door of the most popular funds. Funds of hedge funds, which attract a double layer of fees, now control 38% of hedge funds, up from 28% three years ago.

A recent survey of 400 hedge funds by investment group Hennessee found that hedge fund fees have been creeping steadily higher in recent times, with average fees now around the 1.5% mark. Until recently, the majority of funds charged a fee of not more than 1%.

Hedge funds now tend to take a higher cut of any profits, with some of the more successful funds taking up to 50%, up from a typical incentive fee of 20% around two years ago.

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