Fitzrovia Takes A Closer Look At Hedge Fund Fees

by Carla Johnson, Investors Offshore.com

31 January 2005

A recent study by investment fund research company Fitzrovia has highlighted significant variations in the way hedge funds’ performance fees are structured.

According to Fitzrovia, a Lipper company, around one third of alternative investment funds in the research charge a performance fee at a level other than the ubiquitous “2 and 20” fee structure, whereby funds charge a 2% management fee and a performance fee equalling 20% of net gains.

The study found that 18% of alternative investment funds in the study now have a ‘hurdle’ rate in place, meaning a performance fee will only be achieved once the manager has exceeded a risk-free rate of return.

The research also reveals that 87% of alternative investment funds use a High Water Mark which aims to avoid volatility being unfairly rewarded by ensuring that shareholders do not pay performance fees on a recovery of performance to a previous high.

However, only 2% of alternative investment funds with a High Water Mark reset it after a defined period of time, while the vast majority choose to make it permanent, a fact that Fitzrovia feels works to the detriment of managers and investors.

“In Fitzrovia’s view, it could be to the benefit of both managers and investors if this mark was reset after a period of one to three years,” the firm stated.

Fitzrovia’s report ‘Benchmarking Performance Fees’ analyses the performance fee structures of 2,422 funds, of which 393 are alternative investment funds.

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