Hedge fund managers have been in a 'race to the bottom'

The balance of power between investors and hedge fund managers has tilted in favor of the investors since the financial crisis.

Hedge fund performance has been mixed, which means those who invest in hedge funds have had the upper hand when it has come to negotiating terms.

These investors have been pushing for better liquidity, improved transparency, and lower fees.

And hedge funds have been giving ground in those areas in a bid to win investor support, according to a report from Barclays' capital-solutions group.

"Recent trends in fees, liquidity and transparency suggest almost a 'race to the bottom' among managers," the report said.

These changes made a difference. Lower fees and enhanced transparency helped funds attract assets for a time. Now, though, they have become the norm, and hedge fund performance will again be the key difference maker, the Barclays report said.

Better terms

The report, based in part on a survey of 110 hedge funds running a combined $375 billion in assets, found that the average length of time it took an investor to fully redeem an investment had dropped from about 19 months in 2008 to 11 months in the third quarter of 2015.

Similarly, Barclays found that 46% of respondents now provide data on their positions, with the report describing the figure as "surprisingly high."

Then there is the issue of fees.

"Investors like to believe that the '2 and 20' fee structure should be treated as a relic of the past and should be discarded in favor of more equitable fee arrangements," the report said. "Our sample provides a good bit of proof that this may in fact be happening."

Only a third of the hedge funds sampled in the report had a management fee of 1.75% or higher, though the performance fees have been a bit more sticky, with slightly over half charging 17.5% to 20% and just under a third charging more than 20%.

That said, a lot of funds offer discounts. Only 44% of respondents to Barclays' hedge fund survey said full fees were paid by more than 75% of investors.

Hedge funds have taken all of these steps to make themselves more attractive to would-be investors. But here is the thing: These measures are unlikely to have much of an impact on fund-raising from here on.

"This trend represents diminishing returns to managers and is unlikely to significantly improve asset raising success," the report said.

Instead, it will be all about performance. Hedge funds have had an underwhelming couple of years, and now the pressure is on to get returns back on track.

"Performance (resulting in better investor perception) must be the main priority in 2016 - many of the factors that historically helped raise assets (e.g., lower management fees, offering managed accounts, improving transparency to be competitive) are all 'table stakes' in the arms race between managers now," the report said.