What types of fees do most hedge funds charge?
A. Hedge funds typically charge a fee based on the amount of invested assets (a “management fee”), and a profit based fee (an “incentive fee”). Typically the hedge fund management fee may be set at 1%-2% of assets annually, and the hedge fund incentive fee may be set at 20%-25% of yearly profits. There are many variations to this basic hedge fund fee structure, some fairly common. Many hedge funds observe a “high-water mark.” Under this structure, if an investor loses money with a hedge fund during a given period, no incentive fees will be charged in later periods until these losses are recovered. Another common variation is the “preferred return” or “benchmark.” This means that a hedge fund will not collect an incentive fee until a certain return is achieved.
