Is the 2 and 20 fee structure a non-starter in the UCITS world?

Wed Jan 19, 2011

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COMMENT by Joy Dunbar, Editor of Absolute UCITS

It would appear that the now traditional 2% annual management and the 20% performance fees paid to hedge fund managers is a dying model in the fledgling world of alternative UCITS.

The changing dynamics within the industry is eroding the traditional fee model. The 615 funds (including liquidated funds) in the Absolute UCITS database highlights that there are 389 funds that have an annual management fee between 1% and 1.95%.

Some 95 funds have an annual management fee of less than 1%, 88 funds charge the traditional hedge fund standard of 2%, 33 charge more than 2% and one fund manager charges 4.4% with no performance fee.

More than 320 funds, the majority of funds on the database, charge a performance fee of 20%. This is followed by 156 funds that charge between 10% and 20%, while some 78 funds have no fee, 13 funds charge more than 20% and 19 funds charge between 5% to 9%.

The above figures do not include early bird share classes or special offers.

The figures highlighted from the Absolute UCITS database appear to show pretty clearly that the two-and-twenty model is definitely dying - at least for UCITS versions of hedge fund strategies.

Only 24 funds in the database used the traditional model and a prototype, which is harder to say than two-and-twenty, is developing within the industry. Indeed the four largest funds on the database, by asset size, do not use the traditional 2/20 charging model.

We are living in an age where the balance of power has shifted towards investors, especially larger investors, who have grown increasingly cautious as a result of two disastrous bear markets in the past decade.

Fees have become more competitive because of increased competition between traditional asset managers who need to generate alpha and alternative managers going into the retail world.

In the era of austerity where there is increasing choice and competition, institutional investors will be able to negotiate more favourable terms. And even retail investors with their sticky money look increasingly be able to take advantage of early bird share classes where they are offered.


Interpreting the data on Ucits absolute return fund fees requires a consideration of the type of investment strategy involved and probably the stature of the management company as well. The 2/20 fee structure is a traditional offshore hedge fund structure. Not all Ucits absolute return funds are emulating hedge fund strategies in a meaningful way, with some essentially being hedge funds and some being very much "hedge fund light" from the point of view of their investment strategies. Those strategies that are running closest to traditional hedge funds, and/or those whose strategies are actually going to be able to produce uncorrelated results and so are more than marketing gimmicks, are going to be more likely, it would seem, to command and deserve a higher fee structure. So looking at overall trends on Ucits AR fund fees is not quite so simple.

Mark Milne Jan 24, 2011