Hedge Fund Data

Risk Premia— “You’d be surprised how much it costs to look this cheap!”

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Over the last few years there has been a significant move by investors to reduce the cost of their investments. This has contributed towards a trend in passive investing for long-only portfolio allocations. It has also seen many alternatives looking for more liquid and cheaper products, with some turning to Risk Premia products to replace traditional hedge fund investments. So have those Risk Premia investors benefited from the reduced fees they have secured by switching? The quote from our headline, often attributed to Dolly Parton, may prove to be true for some unfortunate investors.

Looking at the headline terms for the hedge fund industry as monitored by the Aurum Hedge Fund Data Engine* we see that Risk Premia funds are one of the cheapest strategies, with an asset-weighted average management fee of 1.0% and an asset-weighted average performance fee of 12.9%. This is far cheaper than the wider hedge fund industry, with comparable management and performance fees of 1.4% and 17.6% respectively.


Source: Aurum Hedge Fund Data Engine

AUM growth in Risk Premia strategies since 2013 has been strong, mainly as a result of investor subscriptions, with observed assets increasing almost seven-fold to a peak of $66 billion in Q1 2018, as fee conscious investors embraced these ‘cheaper’ strategies.

AUM Growth

Source: Aurum Hedge Fund Data Engine

One method of determining the success of an investor’s choice of investment is net returns, so let’s take a look at how Risk Premia has performed since 2013. According to our data over this period Risk Premia strategies performed worse than any other strategy delivering negligible nominal returns to investors, a mere 5.4% from July 2013 to June 2020 on an asset-weighted basis. Given that the strategy saw inflows of investor capital after an initial period of good performance it actually managed to generate a net aggregate loss of $1.5bn of investor capital over the period in question.

Major HF Strategy Cumulative Performance (Jan 1, 2013 – June 30, 2020)

Source: Aurum Hedge Fund Data Engine

That is not to say that there were not a few diamonds in the rough. However, whether you look at median, mean or asset-weighted average returns, Risk Premia is still the lowest performing strategy. Aurum believes that a well-constructed portfolio of hedge funds can protect and grow capital by providing consistent and diversified returns. A prudent investor should be sure that they understand and monitor the fees in their portfolio and of course always seek the best value available. But the risk/return profile of an investment and its fit within an investor’s wider portfolio should be driving investment choices, not purely fees. After all, cheaper is not necessarily better!

Median v Mean v Asset-Weighted Returns (Jan 1, 2013 – June 30, 2020)

Source: Aurum Hedge Fund Data Engine

*Aurum’s proprietary Hedge Fund Data Engine database containing data on over 4,000 hedge funds representing in excess of $2.9 trillion of assets as at December 2019. Information in the database is derived from multiple sources including Aurum’s own research, regulatory filing, public registers and other database providers.

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