Blockchain Applications and Fee Structure Developments in Private Investment Funds

Abstract

The traditional 2/20 fee structure of private investment funds has come increasingly under pressure in the last ten years. Typical factors considered to explain the pressure on fees in the industry include the inadequate performance of the private investment fund industry, the ability of large investors to negotiate special terms, the withdrawal of private investment fund investments by large institutional clients and public retirement funds, and the consolidation of the industry, among several other market-driven factors. This article explores an additional factor that contributes to the pressure on fees, one that has largely been ignored by commentators: private fund advisers’ use of blockchain technology, artificial intelligence, and big data. Using a dataset of private investment fund advisers that utilize blockchain technology in their investment strategy or internal operations (N=[98]), this article shows that the fund advisers who use the new technology are often able to charge lower fees overall. The article explores the reasons for lower fees in those funds and examines possible future applications of the technology in the private investment fund industry. While the overall proportion of strategies of private investment funds that apply modern technologies, including blockchain technology, is still small, as the use of blockchain technology grows in the private investment fund industry, the pressure on the fee structure is likely to continue to grow.