Why are hedge fund fees so high compared to traditional funds?
Fees in the hedge fund industry remain high compared with traditional investment management. Hedge fund management companies typically charge private investors a 1-3% annual management fee and a 20% or higher performance fee. The performance fee is typically charged only on profits that exceed the ‘high watermark’ of an investor’s net asset value and is sometimes levied on performance in excess of a benchmark such as LIBOR. The justification for such high fees is that hedge fund management companies limit assets under management to strive for absolute performance that is primarily alpha or skill-based rather than asset class driven.
