More hedge funds are agreeing to conditions on their performance fees, reflecting a tougher environment for attracting investors to riskier strategies.

A survey by Barclays Plc found 67% of investors now prefer a hurdle rate, meaning the fund must perform a certain amount above a threshold before they can charge incentive fees.

And hedge funds appear to be obliging, with investors indicating hurdle rates were more available in 2023 compared to historically, according to around 310 asset allocators polled by Barclays.

Funds are facing questions about fees and expenses in a high-rate environment in which relatively low-risk products provide decent returns. Last year, the average hedge fund returned about 8%, according to data compiled by Bloomberg, while the risk-free rate was about 5%.

However, these averages mask the extremes: the priciest funds are able to keep most of their profits as fees, while investors piled on downward pressure on many funds by yanking more than $100 billion from the industry for the second consecutive year in 2023, according to Nasdaq eVestment.

The sign of rising investor expectations chimes with a report by Goldman Sachs Group Inc. last week, which said almost half of hedge fund investors are actively seeking cash-based hurdle rates, while nearly a third of respondents to a recent BNP Paribas SA survey scored hurdle rates as a high priority when making new allocations this year.

Barclays also found investors were targeting 9% returns when they put money into hedge funds this year, up from about 7% historically as they factor in the rise in risk-free returns, putting additional pressure on funds to perform.

Both the Barclays and Goldman Sachs research showed declining appetite for multimanager funds, which have dominated fundraising in the hedge fund industry in recent years and can command some of the highest fees. To be sure, Barclays noted that interest remains relatively high.

Overall, despite these pressures, 85% of investors plan on making at least one allocation to hedge funds in 2024, up from 80% the year before. Just 33% of planned allocations will go into existing relationships, Barclays found. 

This article was provided by Bloomberg News.