Financial Times: The Hedge Fund Fee Structure Consumes 80% of Alpha

Investors bear the risks and managers reap the rewards, says Beachhead’s Andrew Beer.

The average hedge fund earns 1.67 per cent in management fees and is paid 18 per cent of investment profits annually. Over the past ten years, investors paid away half of pre-fee returns. Even more troubling is the fact that fees consumed 80 per cent of alpha, the active return on an investment.

Yes, the industry still generates a lot of alpha, but it goes to the managers, not investors.

How did we end up in a world where investors bear the risks and managers reap the rewards? The fee structure is to blame.

Twenty years ago, the “2 and 20” fee model made a lot of sense because most hedge funds were small. The 2 per cent management fee on a $10m fund covered the rent and paid for a hire or two.

The real money was made on the performance fees. Today, that $10m fund is $10bn and the fee structure is the same. The industry has matured, but the fee structure has not. This is a big problem for three reasons.

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June 15, 2016