By LAURENCE FLETCHER From The Wall Street Journal

Most hedge funds are based in the Cayman Islands. But more and more are choosing to be domiciled in Europe.

Hedge funds’ notoriously high fees are inching ever lower.

Managers have been finding it harder to charge a fee of 2% annually on the money they manage plus 20% of whatever trading profits they make, according to industry data.

Mediocre returns—including losses last year and this—have put paid to the argument that managers can produce so-called absolute returns—making money in all markets.

Data this month from Hedge Fund Research shows that performance fees fell to 17.7% from 17.8% over the course of last year. Management fees dropped by 1 basis point to 1.5% over the course of last year, having fallen 3 basis points the year before.

Meanwhile, figures from a Deutsche Bank survey of investors managing $2.1 trillion of hedge-fund assets showed management fees dropping to 1.63% from 1.65% a year ago and 1.69% two years ago. Performance fees dropped to 17.85% from 18.03% in last year’s survey and 18.21% two years ago.

However, that’s still significantly above the cost of funds that simply track a stock market, which is often a matter of basis points.

Here are four ways investors can save money on fees:

1) Invest in a start-up hedge fund or a fund that’s keen to win investors back

Start-up funds can be cheaper than long-standing funds if you opt for one that isn’t run by a big-name manager. Such funds are often keen to secure investors early on, in return for lower fees.

For instance, Roxbury Asset Management charged a 0.5% management fee for investors putting money in last year, and a 0.75% fee for those investing in the first quarter of this year. After that it jumps to 1.25%.

Meanwhile, if assets have dropped sharply, funds can sometimes slash fees to woo investors back. Quality Capital Management Ltd, a computer-driven hedge-fund firm that has seen assets tumble from around $1 billion to $50 million in recent years after client withdrawals, launched a fund last summer with a zero management fee.

2) Invest in a European-domiciled fund

Most hedge funds are based in the Cayman Islands. But more and more are choosing to be domiciled in Europe.

While these funds can appear very similar to Cayman funds, there are tiny technical differences. One can be in how performance fees are calculated.

Cayman funds generally calculate when to charge these fees for each investor. European funds often calculate them for investors as a group.

What this means is that investors in a European fund that has recently lost money can gain a “free ride” on performance fees until the fund makes back those losses. So if a fund’s value falls from 100 cents to 80 cents, new investors buying in at 80 cents may not pay performance fees up to 100 cents.

3) Negotiate

Hedge funds often used to hold the upper hand when it came to talking about fees. Now, investors regularly negotiate. And funds often privately admit to being willing to charge lower fees for investors with a lot of money to deploy.

“Larger allocators with large ticket sizes are negotiating fees more frequently than their smaller peers, and are also paying slightly lower fees,” said Anita Nemes, global head of capital introduction at Deutsche Bank.

4) Invest using a managed account

A managed account is a separate pool of money run by the fund manager but still controlled by the investor.

By using a separate, managed account, an investor can negotiate fee discounts, without the fund manager then having to give those same discounts to other big investors.

Managed accounts “almost always can have better terms than the main fund,” said the head of investments at one multi-billion-dollar investment firm.

IMAGE: Cayman Islands.

For more on this story go to: http://blogs.wsj.com/moneybeat/2016/03/30/how-to-save-money-on-hedge-fund-fees/