Wednesday, July 30, 2008

Hedge Fund Fees

In instances of poor performance, funds may choose to close down rather than work without fees, as would be required by their high water mark policies. Due to this, Hedge funds can have very short lifespans, especially if the manager makes a critical error. There is very little to prevent an Investor from losing all the money he invested in a hedge fund. In fact, hedge funds penalize investors who try to withdraw their money. They do this be charging investors a fee if they withdraw money from the fund before a certain period of time has elapsed since the money was invested. The purpose of the "surrender charge" is to moderate the outflow of assets, which can allow the fund manager to reduce the turnover of investments, fund managers claim this helps them invest in more complex, longer-term strategies. The fee also dissuades investors from withdrawing funds after periods of poor performance. The fee is typically known as a "withdrawal fee" or a "redemption fee" Having a hedge fund administrator for your fund is extremely important in today’s constantly changing hedge fund environment.

Thursday, July 10, 2008

Performance Fees

Typically, hedge funds charge 20% of gross returns as a performance fee, but again the range is wide, with highly regarded managers demanding higher fees. In particular, some hedge funds have performance fees as high as 44%! Managers argue that performance fees help to align the interests of manager and investor better than flat fees that are payable even when performance is poor. However, performance fees have been criticized by many people, for giving managers an incentive to take excessive risk rather than targeting high long-term returns. In an attempt to control this problem, fees are usually limited by a “high water mark” and sometimes by a “hurdle rate”.

Saturday, July 5, 2008

Hedge Fund Fees

To insure that a hedge fund stays as profitable as possible, the fund manager is paid via both a performance and management fee. These fees are closely associated with hedge funds, and are intended to incentivize the investment manager to produce the largest returns they can. This is because a typical hedge fund fee is “2 and 20", which refers to management fees of 2% and performance fees of 20%. These ratios are very different from those found on a public mutual fund.