A Singapore hedge fund is offering a relatively rare, client-friendly fee structure for investors as capital inflows for  the industry slow and higher interest rates enhance the appeal of cash.

Dymon Asia Capital is creating a new share class as part of a $1 billion fundraising for its multi-strategy hedge fund, which includes a so-called hurdle rate. This means it won’t charge performance fees until investors in that share class have pocketed at least a 5% return for the year.

“Basically, at below 5% we don’t deserve to get paid,” Dymon founder and Chief Executive Officer Danny Yong said in an interview from his Singapore office.

While hurdle rates are common among private equity funds and are sometimes offered by hedge funds to their largest or earliest backers, most don’t grant them to entire groups of customers. At Dymon, it will be available to investors joining the $1 billion fundraising it made public last year, along with any existing clients who wish to switch over.

Dymon’s move comes as hedge funds face rising pressure from investors to justify their fees and expenses in a high-rate environment in which relatively low-risk products provide decent returns. The yield on 90-day US Treasury bills, a proxy for cash, hit a 22-year high in October and still hovers above 5%.

Yong, whose firm manages about $4.3 billion in hedge fund and other assets, said investors have told him they have trouble making investments in absolute return or other hedge funds because so many of them generate low returns when rates are high.

Under the performance fee structure for the new share class, Dymon will charge 15% when returns top 5%, rising to 25% after gains exceed 15%.

================================================================
Investor’s Net Return | Performance Fees
================================================================
0-4.99%| 0%
5-9.99%| 15%
10-14.99%| 20%
Above 15% | 25%
Source: Dymon Asia Capital

An executive at a rival hedge fund, who asked not to be identified discussing confidential matters, said the number of requests from clients for hurdles has been rising over the past four months — driven by higher cash rates.

Institutional investors such as charitable foundations typically have to pay out at least 5% of their asset value every year, according to an Alternative Investment Management Association report. When added to 2% inflation, most will target returns in excess of 7%.

“The hurdle rate is becoming an increasingly popular tool being used by allocators in shaping the performance fee charged by funds,” said Tom Kehoe, global head of research and communications for AIMA, whose members manage a combined $3 trillion. “The current environment of higher interest rates has by extension resulted in some managers having to clear a higher hurdle.”

Dymon aims to generate after-fee returns of 10% to 15% each year, after posting a net gain of 12% in 2023. The firm, which started as a macro hedge fund manager, announced to clients in 2019 that it would fold macro trading into its new pod shop business that employs teams of investors to trade with different strategies. While its 5.1% return in 2022 failed to hit the mark, the firm was still restructuring at the time, Yong said.

Dymon already has enough indications of interest from clients to fill the $1 billion fundraising target, according to
Yong. That will be added to the $2.3 billion in the multi-strategy product.

To spread out investments, Dymon plans to take in new money in four equal installments, with the first $250 million arriving at the end of March, Yong said. The firm will add another 25 portfolio managers this year, adding to the 53 employed now. Dymon separately manages an additional $2 billion in non-hedge fund businesses, he added.

Source: Bloomberg Hedge Fund Dymon Waives Performance Fees Until Target Met – Bloomberg