Hedge fund managers are increasingly abandoning the industry’s traditional “2 and 20” fee structure and are adopting more bespoke compensation arrangements with their investors, according to a new study from industry trade group the Alternative Investment Management Association (AIMA) and consulting firm RSM.

According to new research — which includes a survey of 118 hedge fund managers with approximately US$440 billion in assets under management (AUM) and input from investors who manage more than US$1trillion in AUM — the average management fee hedge funds are charging is now 1.3% of AUM, and 1.4% for funds launched in the past 12 months.

With management fees declining, hedge funds are instead taking a bigger slice of the upside.

“When it comes to reconciling the most appropriate fee structure being charged to investors, between 20% to 30% of the alpha earned being paid to the hedge fund feels about right,” the study said.

“Our discussions with managers and investors reveal a shared belief that the manager share of any alpha earned should be about one third, with the remainder going to the investor,” it noted.

The study also found that hedge funds are increasingly adopting tiered fee structures for investors — with fees declining on a percentage basis as AUM increases.

And, it said that fund managers and investors are more clearly defining the division of operating expenses between costs paid by the manager and costs covered by investors.

“Faced with what is fast becoming a buyers’ market, hedge funds are becoming more responsive than ever,” the study said.

“Over the coming years, there will likely be greater fund transparency, true knowledge sharing and more co-investment options as hedge funds and investors align their interests more closely,” it added.