Hedge fund fees and the fall in innovation

The Economist reported that hedge fund fees continue to decline with management fees down to, on average, 1.4% and incentive fees dropping to 17%. The days of 2/20% are over. Managers may post 2/20% as the stated fees but everyone wants a deal. The result is that less innovation will occur because the money necessary to start a hedge fund will be higher. The large funds that show declining performance because they become more beta-like will be able to reduce fees and still make a healthy profit at the expense of smaller funds. As funds get larger, they can discriminate between management and performance fees. Cut management fees for higher performance fees since the fixed costs are covered or just offer a flat fee on a higher AUM. 

All of the evidence suggests that small and newer funds perform better, but if there is more fee compression the market will not get the entrepreneurial manager starting out with a better idea.