By Maiya Keidan and Simon Jessop
LONDON (Reuters) - The majority of hedge funds are passing on charges for investment research to investors under new European Union rules, despite years of poor average performance and as many large traditional asset managers absorb the cost themselves.
Billing clients, however, could prove increasingly untenable for underperforming hedge funds as investors have become used to receiving research services for free elsewhere.
Hedge funds took in $36.2 billion (27.5 billion pounds) between January and April, data from Eurekahedge showed, continuing a recovery begun in 2017, when investors put in $113.5 billion. They took out $20.1 billion in 2016.
The EU's Markets in Financial Instruments Directive II, dubbed MiFID II, which took effect six months ago, states investment research must be priced separately from other broker services to ensure transparency and better value for money.
Given the choice of paying the bill themselves or passing it on, industry tracker HFM Insights said 63 percent of 113 hedge fund managers surveyed were billing the cost to clients.
That contrasts with traditional asset managers, who are mostly paying for it themselves, partly due to the operational complexity of charging and to avoid having to justify higher fees than rivals during a period of intense fee pressure.
Bill Muysken, chief investment officer, alternatives at leading pension consultant and investor Mercer, said the funds his clients were invested in were broadly split between the two payment models.
Many of those passing the cost on said they were doing so because they were small businesses, had not budgeted for the costs and were therefore unwilling to pay, he said.
"It's sustainable as long as you're earning good returns. The better your performance, the more you can sustain that. Conversely, the more disappointing your performance, the less you can," he said.
At the end of April, the average hedge fund was up 0.2 percent year-to-date, industry tracker Eurekahedge showed, with one in 10 managers posting gains of over 5 percent. By contrast, the Standard & Poors 500 index <.SPX> was up nearly 5 percent.
Hedge fund investments are typically only available to professional investors and are famed for charging much more for their services than their retail-friendly traditional peers, in exchange for hopefully better and more sustainable returns.
With stock markets in countries such as the United States trading at relatively high valuations and global monetary policy increasingly divergent, many investors have increased their allocations to hedge funds, despite having to pay for research.
Typically run as much smaller companies, many hedge funds employ fewer analysts than traditional firms and may rely more on buying external research to bolster their investment ideas.
The hedge fund industry in Europe has just over $724 billion assets under management, with the average fund just $320 million, according to industry tracker Preqin.
(Editing by Alexandra Hudson)