The priciest multistrategy hedge funds are now keeping most of the profits they generate, while clients shoulder their costs.

Clients received 41 cents of every $1 made by multistrategy funds that passed on all their costs last year, according to a survey by the prime brokerage unit of BNP Paribas SA. Their share is down from 54 cents in 2021, reflecting a startling new reality where the most popular funds effectively have a blank check for expenses.

These funds outperformed peers, and most of the wider industry, on investment returns. However, gains measured after fees are the lowest among multistrategy funds, the poll of 238 allocators managing or advising on $1.2 trillion in hedge fund assets found.

It’s a big departure for an industry once known for its 2+20 model. Previously, clients expected to pay a fixed 2% of their investment in fees, plus 20% of whatever profit the fund made over a certain threshold.

In the past decade or so, this standard has come under pressure and most funds charge less than 2%, while more investors are demanding funds reach a minimum return before they charge performance fees.   

Multistrategy funds have upended the fee structure, though, as their method of spreading trading risk across many teams attracts a wave of client money. With demand soaring, some funds introduced pass-through fees that allowed them to charge clients for bonuses, research, entertainment or other expenses.

The question now is whether these funds can continue to justify their fees if returns disappoint. The PivotalPath Multi-Strategy Index rose about 6% last year, among the worst-performing hedge fund strategies. Balyasny Asset Management and Schonfeld Strategic Advisors each returned less than 5%, while Millennium Management and Citadel’s Wellington fund bucked the trend, returning 10% and 15.3%, respectively.

“There is more demand than ever for a small subset of the multi PMs, but it is a really small subset. You can count them on three to four fingers,” Marlin Naidoo, global head of capital introduction and consulting at BNP Paribas, said in an interview.

While BNP Paribas found fund clients expect to investment a further $17 billion across the industry this year, Naidoo said it will be a critical time for funds that underwhelm. “If multi-managers have another year with a similar output, there will be a lot of people questioning how many of these they have in their portfolio,” he said, adding that investors want at least 9% return on their hedge fund allocation.

Looking ahead, investors told BNP Paribas that consolidation within the hedge fund industry and multistrategy players was on the cards. As clients rush toward the best-performing funds, some expect to see more restrictions on withdrawals and higher fees. Others predicted single managers will start attracting investors again.

This article was provided by Bloomberg News.