The biggest hedge funds and other large fund investment vehicles have long been known for charging a premium for shares of stock, but some of the most profitable of these funds are now offering cash-only offerings.
In fact, according to research firm Capital Good, as many as 80% of funds listed on the New York Stock Exchange are offering cash equivalents as a means of reducing costs.
Capital Good analyzed data from publicly traded hedge funds for the past five years and found that over the last two years, the largest funds have significantly decreased their annual fees.
In 2017, the average annual fee for a fund with a $1 billion valuation was $4,300.
By 2019, that figure had fallen to $3,600.
The same pattern has been happening with the average fee for cash-based funds.
In 2016, for example, the annual fee was $2,200 for a $5 billion fund with $20 billion in assets.
In 2019, the same fee dropped to $1,500 for a similar fund with about $2 billion in investments.
This is the same strategy used by some large hedge funds.
Capital Goods also found that the average investment of a cash-focused fund was $17,000.
This represents a significant reduction from the $25,000 average fee paid by many other funds.
And it’s the same approach that some of those funds are following.
For example, in 2016, the S&P 500 fund with more than $3 billion in holdings offered cash-equivalent funds that are priced at $4.25 a share.
In 2018, the Vanguard Total Stock Market Fund offered a $4 a share cash-and-stock-equity portfolio that is priced at 1.5 times earnings per share.
That’s a roughly 50% drop in annual fees from the past two years.
CapitalGood notes that while the average cost of a fund will decrease, the cost of doing business with the fund owners and other shareholders will likely remain relatively low.
This will help make it easier for them to keep their companies running and provide them with the necessary liquidity to invest in new investments, as well as fund their dividends.
The average annual fees paid by the largest fund firms for cash equivalents fell to $6,600 from $9,600 in 2017.
For the fund with the largest number of funds, the median annual fee fell to nearly $2.3 million.
The bottom line: cash-cap-and trade funds are an increasingly popular way to pay up to avoid capital gains taxes.
But as these funds become more popular, it will be interesting to see how much of a tax break they receive.
What do you think?
Are cash-free funds an efficient way to manage risk?
Let us know in the comments below.