Investors Still Award Bonuses to Hedge Funds Despite Lower Returns
A recent note from Goldman Sachs reveals that the majority of investors continue to award bonuses to hedge funds, even if their investments fail to outperform bank savings accounts. The note, which surveyed 340 investors with $1 trillion in assets, found that only 11% of investors have renegotiated the minimum returns hedge funds must achieve in order to justify bonus fees on top of costs.
Interestingly, sitting on cash has become a more lucrative option in the past year. Savings accounts in the United States currently offer interest rates of about 5.5%, while in Europe, the rates are around 3.75%. These rates surpass the returns of many hedge funds, prompting some investors to question the value of paying bonus fees.
The survey conducted by Goldman Sachs revealed that 73% of the investors surveyed were based in the United States. Most investors rely on the Hedge Fund Research (HFR) index to determine whether their hedge funds have performed well enough to earn a bonus or performance fee. The widely-used HFRI 500 Fund Weighted Composite Index has returned 3.83% this year, outperforming cash savings in Europe but falling short of returns in the United States.
Some hedge fund agreements base fees on a past high that the fund has hit, known as a high-water mark, rather than a minimum threshold. This year, while 70% of funds have had a positive year, many have failed to surpass their previous best month or day. This has made it challenging for these funds to retain staff who are eager to receive a share of those bonuses.
According to the survey, only 8% of investors said that hedge funds had outperformed this year, the lowest proportion since 2018. Investors managing pension fund schemes were found to be the least likely to increase their exposure to hedge funds. Higher interest rates have pushed many pension funds towards a funded status, meaning they no longer require high investment returns to pay scheme retirees. As a result, these investors may shift their focus to fixed income markets.
Despite these findings, corporate bonds remain the top choice for investors overall. Goldman Sachs notes that there has not been a significant increase in flows towards corporate bonds, suggesting that investors may be waiting for the right economic conditions to pursue this strategy, particularly in distressed credit.
In conclusion, the survey conducted by Goldman Sachs reveals that most investors continue to award bonuses to hedge funds, even if their returns are lower than those offered by savings accounts. However, there is a growing interest in cash savings due to higher interest rates. Hedge funds that have struggled to meet their high-water marks have faced challenges in retaining staff. Investors managing pension fund schemes are less likely to increase their exposure to hedge funds as they shift towards funded status. Corporate bonds remain a popular choice for investors, although flows towards this asset class have not significantly increased.
