What are the Most Common Management Fees for Crypto Funds?
How much do fund managers charge independently of their funds’ performance? In this article, we will address the topic of base fees for crypto funds. We use the 21e6 Crypto Fund Database, a crypto investment dataset with crypto fund of funds and crypto SMAs, as a basis.
Authors: Jan Spörer, Maximilian Bruckner
Introduction
In a previous article, we discussed the performance fees associated with crypto funds. While many crypto fund managers will earn more from performance fees than from management fees, management fees are important to cover operational expenses such as fees for administrators, registrations, transactions, bank accounts, accounting, and audits. They provide a stream of income for crypto asset managers that is often not enough to cover all personnel expenses, but at least there is some cushion for recessive periods.
0.0% — 0.8%: A Minimum That is Usually Compensated by Performance Fees or Only Available to Passively Managed Funds
Twelve funds in our database have performance fees lower than 0.8%. With such low fees, some smaller funds may need additional financing streams to cover the most basic cost drivers in a fund, not even counting salary expenses. Fund administrators and banks can usually be covered with approximately 0.8% or less of the assets under management of a fund, but not always.
It is thus no surprise that only so few funds opt for this option. Such low fees cannot cover salaries and other expenses for the fund manager unless the fund is significantly large according to crypto fund standards. We estimate that only funds with USD 100m or more can sustain all of their expenses reliable if they only charge 0.8% (and no performance fees).
Most of the funds in this bracket either have high performance fees between 30% and 40%, or are passive funds with high assets under management and minimal administrative overhead.
0.81% — 1.3%: The Sweet Spot for Many Fund of Funds and Discretionary Funds
In this lower-middle tier bucket, we find discretionary funds, fund of funds, and passively managed funds.
Discretionary funds have comparatively little overhead. Discretionary crypto fund managers can scale their teams up and down without losing core operational capabilities, while systematic funds often heavily rely on software engineering and automated execution, causing higher fixed costs. For this reason, discretionary funds can save on management fees and live with low fee income in down markets.
Fund of funds frequently charge according to the 1/10 model (1% management, 10% performance). These multi-funds do not need to run their own trading systems. While manager due diligence takes time, the operational overhead is usually lower than running a fund directly.
Passively managed funds, again, also come with a lower overhead as they do not require a portfolio management team that determines the target weights of the portfolio. Passively managed crypto funds follow systems that are simple to model and relatively easy to execute.
1.31% — 1.8%: More of the Same Fund Strategies, Plus Quantitative Managers
In addition to discretionary funds, fund of funds, and passively managed funds, we also find quantitative funds in this category. For example, some long-short futures traders charge around 1.5% per annum for managing their clients’ money.
At this fee stage, it becomes profitable for some traders to run long-short strategies. These strategies are often executed by automated systems, causing overhead costs that are hard to cover at 1.3% fees and below.
Arbitrage strategies are usually too complex for this fee bucket, and can thus be found only in the next tier.
1.81% — 2.3%: The Industry Standard
2/20 is the fee standard familiar to both investors and managers in the hedge fund industry. While this standard was pronounced dead many times in the past due to alleged price pressures on managers, our data clearly shows that the 2% management fee, which is the “2” component of “2/20” is still the most common fee tier. This fee structure is accompanied by a 20% performance fee.
The reasons for this are manyfold: 2/20 is a fee structure that people anchor around due to its perceived commonality.
Furthermore, a management fee of 2% allows the manager to pay expenses and oftentimes salaries even in bear markets.
2.31% — 2.8% and Other Fee Structures: High Fees for The Most Established Players
Interestingly, we find many simpler strategies in the high-fee bucket. Fund managers with long, exceptional track records can often command significantly higher fees. Also, there are passively managed products in this bucket that are accessible for retail investors via traditional brokerage accounts and traditional stock exchanges, making these products sought after due to their accessibility.
Other fee structures typically encompass fees that are too intricate to categorize within the previously mentioned buckets. Some funds come with significant subscription fees or redemption fees, for example, and one cannot easily compare those fees to one another.
Conclusion & Outlook
Some investors believe that higher performance fees and lower management fees improve the alignment of managers and investors. However, investors should be cautious, as performance fees can incentivize managers to take excessive risks. [1] Thus, investors should not solely dismiss a fund based on higher management fees. With the high volatility in crypto markets and the associated risks, investors should take the time to evaluate whether it is wiser to pay more in management fees to save on performance fees.
As we mentioned in a Bloomberg research article based on the 21e6 Crypto Fund Database, some funds closed earlier in the year, further reducing the investment opportunities that investors can choose from. [2]
As the Bitcoin halving cycle suggests, we may approach a bull market again. Considering the high potential returns expected by some investors in the crypto markets, we believe management fees will not be a significant concern. As a result, we expect fees to stay where they are.
Above, we’ve described how the variation in fee structures will continue to depend on the operational complexity of the portfolio strategy and the manager’s reputation. We don’t foresee competitive pressure leading to drastic changes in fee structures.
Disclaimer: The information provided in this article is for informational purposes only and should not be construed as investment advice, endorsement, or recommendation. Consult with a qualified financial professional before making any investment decisions. Neither the authors nor 21e6 Capital shall be liable for any loss or damage arising from reliance on the information contained herein.
About 21e6
21e6 Capital is a Swiss investment advisor, connecting professional investors with optimal crypto investment products.
Please find more information about our authors on our homepage: 21e6.io
Authors
Jan Spörer is Due Diligence Manager at 21e6 and responsible for overseeing the content quality management of the 21e6 Crypto Fund Database.
Maximilian Bruckner is Head of Marketing & Sales at 21e6 Capital AG.
References:
21e6 Crypto Fund Database, cryptofunds.21e6.io
Originally published at https://assets.21e6.io.
