What kind of fees do most hedge funds charge?
The majority of U.S. hedge funds charge the standard “one-and-twenty”: 1% of assets and 20% of profits, annually (more precisely, the 1% fee is usually charged in .25% increments quarterly, in advance while the 20% is usually calculated annually). These are known as the “management fee” and “performance fee” respectively. There are many variations and embellishments, some fairly common. For instance, most funds observe a “high-water mark”. This simply means that if, in a given performance fee period, a fund loses part of its investor’s money; the investors will not be charged in later periods until the losses have been recovered. Another common variation is the “preferred return.” This means that a fund will not collect a performance fee until a certain return is achieved. This is often fixed, say at 10%, or ‘floats’ along with some risk-free interest rate indicator.
