Fee Pressure Looms for Underperforming Hedge Funds, Nomura Says

(Bloomberg) -- Investors are starting to withdraw money from mediocre Asian hedge funds that charge high fees, a trend that’s forcing changes in the economics of the business, according to the global head of prime brokerage at Nomura Holdings Inc.

“Organizations and investors don’t like to pay 2-and-20 when funds are not making money,” Nomura’s Christopher Antonelli said in an interview. “The big investors are forcing that change and they will continue to do that by starting to pull money. You don’t get any more money if you don’t change.”

Hedge funds charge the most among asset managers, traditionally raking in 2 percent in management fees and 20 percent of investment gains. They’re now seeing investors push back after many have failed to beat benchmarks amid volatile market conditions. Globally, 84 percent of investors in hedge funds pulled money in the first half of the year, with underperformance being the main driver of redemptions, according to a Credit Suisse Group AG study released Tuesday.

“With the new launches, we are seeing more varied fee structures and we will continue to see that,” Antonelli said.

Fewer Startups

Against this backdrop, Antonelli sees fewer high-profile hedge fund launches in Asia. With a cyclical slowdown in major markets such as India and China, hedge funds may abstain from starting, while major firms headquartered in other parts of the world won’t set up regional offices in the region, he said.

“There have not been many large funds that have started in Asia recently and I’m not sure that’s going to change anytime soon,” Antonelli said.

Launches in Asia are on track for the lowest level in at least 10 years, according to data provider Eurekahedge Pte, with 18 new openings in the first half of the year, less than a quarter than the 79 funds started in 2015. There has been no launch with assets of more than 100 million this year, the data show. That compares to seven launches surpassing that amount in 2015 and and least 14 launches in each of the previous six years.

Nomura is one of Japan’s two biggest prime brokerages, and focuses on selling Asian products, Antonelli said. The 80-staff unit is based in Hong Kong and has departments in London and New York. Prime brokers typically provide services like lending securities for shorting, executing trades or lending money.

While Antonelli said Nomura’s business is doing well because of its niche focus on smaller managers in Asia, he added that “it’s becoming more and more difficult to make money in prime brokerage. There is cost compression everywhere.”

To contact the reporter on this story: Klaus Wille in Singapore at kwille@bloomberg.net. To contact the editors responsible for this story: Sree Vidya Bhaktavatsalam at sbhaktavatsa@bloomberg.net, Russell Ward