Hedge Fund Fees Creep North As Investment Boom Continues

by Phillip Morton, Investors Offshore.com

12 October 2004

According to a report by the Wall Street Journal, hedge funds have sought to capitalise on their surging popularity with wealthy individuals and institutional investors by increasing fees and taking larger cuts of investment returns.

Citing a survey conducted by investment advisor Hennessee Group, the report stated that 41% of hedge funds now charge a fee of more than 1% of invested assets, a trend it observes is more prevalent amongst newer entrants to the hedge fund industry; 400 new hedge funds reviewed by Hennessee in the past year charged fees averaging 1.5%. Until recently, the majority of funds charged a fee of not more than 1%.

Meanwhile, the larger hedge fund firms, such as Tudor Investment Corp and Highbridge Capital Management, tend to charge fees of between 2% and 4%, the WSJ reported.

Moreover, many of the best performing firms have also been raising the percentage they take from investors on the profits made by the fund, which can vary from 30% to as much as 50%, up from a typical ‘incentive fee’ of 20% about two years ago.

For the investor, this adds up to a sizeable chunk of any returns. An investment in a hedge fund with a 3% fee and taking 30% of profits will effectively reduce a 10% investment return to 4.9% after fees.

Whilst this fee structure has begun to put off many endowment funds, it has failed to abate the tide of money that continues to flow into hedge funds, which reached a record $43 billion in the 2nd quarter of 2004, according to CSFB/Tremont.

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