DE Shaw is ratcheting up the cost of its flagship $14bn hedge fund despite falling fees across the asset management industry, highlighting the still-ravenous demand enjoyed by top quantitative investment groups.
The hedge fund industry has come under pressure to cut fees, after a long spell of underperforming mainstream markets, rising cost-consciousness among investors and stronger demand for other “alternative” investments, such as private equity.
Hedge funds historically charged a 2 per cent annual management fee and 20 per cent of any profits. However, only 3 per cent now charge a 2 per cent management fee, and 16 per cent take a fifth of profits, according to Credit Suisse. The average is now just 1.45 per cent and 16.9 per cent respectively.
DE Shaw, founded by the reclusive billionaire computer scientist David Shaw, was also forced to cut the fees on its Composite Fund in 2011, from a 3 per cent management fee and a 30 per cent performance fee to a still-high 2.5 per cent and 25 per cent.
However, the fund has been closed to new investors since 2013, and strong performance — it returned 11.2 per cent last year, in spite of the market turmoil — means that the hedge fund feels confident enough to lift its fees back to its previous “3 and 30” level, according to a person familiar with the matter.
Volume of money pulled out of hedge funds in the first quarter
“There are powerful trends that are reshaping the industry underneath the surface,” Barclays said in a report on hedge funds earlier this spring. “Strategy-wise, there has been a massive rotation over the past few years away from discretionary strategies and into quantitative ones.”
The industry’s top players are benefiting disproportionately from this, in what analysts have termed a “barbelling” of the asset management ecosystem, where cheap and simple strategies and expensive, high-octane ones enjoy most of the investor demand.
This bifurcation was underscored in the divergent performance of many hedge funds amid last year’s market mayhem.
While the average hedge fund lost 4.8 per cent in 2018, according to HFR, a researcher, DE Shaw and other big, largely computer-powered “systematic” players managed to profit from the turbulence. Bridgewater’s Pure Alpha returned 14.6 per cent, Renaissance Technologies’ Institutional Equities fund gained 8.5 per cent, and Two Sigma’s Absolute Return and Compass funds rose 11 per cent and 14 per cent respectively.
Despite hedge funds broadly enjoying their best start to a year since 2006, investors yanked another $17.8bn out in the first quarter. In contrast, several of the biggest quant hedge fund vehicles remain closed to new investors, given that their strategies could splutter if too much money was put to work.
However, DE Shaw’s decision to lift the fees on its Composite Fund — effective from the start of 2020 — also reflects how even the industry’s biggest players are feeling the pressure of mounting costs and ferocious competition for talent.
This is especially true for data scientists and programmers that have become increasingly important in the money management industry, and form the backbone of people at quantitative investment groups such as DE Shaw.
Headhunters estimate that a “quant” with merely five years of experience could expect pay packages of at least $300,000 a year, up from about $250,000 a few years ago, while more senior analysts and portfolio managers can expect at least $500,000 and probably well over $1m.