Hedge Fund Fees Going Down

November 17, 2018 James Heinsman Hedge Fund News

Photo courtesy Michael Daddino.

Ever since Alfred Winslow Jones created the first hedge fund in history, hedge funds have charged their customers according to the famed 2 and 20 fee structure. Anecdotally, it is said that AW Jones and Company charged 20% of profits and a 2% management fee based on the exploits of the Phoenician sea captains who took 20% of the profits of their successful sea voyages. Ever since then hedge funds traditionally charge 2 and 20.

But in the face of declining profits and a highly volatile market in which hedge funds have failed miserably to keep pace with the stock market, hedge funds have more and more reduced their fees. According to Keith Seibert, the managing director at CM Capital Advisors:

“Only 30% of hedge funds have a 2 and 20 fee. Other media talk about the 2 and 20 fee structure, but it’s only 30% of the funds.”

Seibert was speaking at the Gaining the Edge hedge fund conference in New York. Seibert continued:

“We do spend a lot of time [analysing fees], we want to make sure the management fee is being spent properly… but at the end of the day we’re not forced to invest in anything, so if you have a philosophical issue with 2 and 20, then there’s 8,000 other hedge funds.”

Hedge funds originally felt they could get away with high fees based on the promise of expert investing skills leading to excellent returns to matter if the market was bullish or bearish. Instead, especially after the financial crisis of 2008, hedge funds have performed poorly. According to HFRI, a provider of data, the whole-industry index for hedge funds rose 64.3% during the past ten years, while MSCI World grew 172.9% in dollar terms.

To continue to attract investors many hedge funds have introduced lower fee structures. Protégé Partners, a fund-of-hedge-funds firm based in New York has a “1-10-20” fee structure. The management fee is a flat 1%, and the incentive fee is 10% on returns below 10%, and 20% on returns above 10% net.

Chief investment advisor at Protégé Partners, Michael Oliver Weinberg said:

“We designed 1-10-20 to address the misalignment of interests between managers and investors. At low rates of returns, managers were earning a disproportionate percentage of the returns. With the 1-10-20 structure, managers get a lower percent until the investor achieves a higher rate of return.”

Author of “The Hedge Fund Mirage” and managing partner of SL Advisors, Simon Lack agrees that fees should come down.

“There should be pressure on hedge fund fees as returns have been coming down for years. This is a good thing and well overdue.”

Alfred W. Jones, Alfred Winslow Jones, CM Capital Advisors, Keith Seibert, Michael Oliver Weinberg,

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