Understanding Fees for Hedge Fund Investments
Have you ever read about Billionaire hedge fund managers and wondered, how can someone make so much money? Well, since this is a thought that is frequent amongst beginners, we felt we would answer this question and expand on the topic.
In this brief article, we will outline the typical fee structure for a hedge fund, while discussing the common and less frequent fees associated with hedge fund investing. In addition, we will detail the importance of understanding these fees before moving forward with any hedge fund.
First things first, let’s start off with the two most common hedge fund fees, the “incentive fee” and the “management fee”.
An “Incentive Fee” is the percentage of the profit that is due to the hedge fund manager for their account management and trading services. Typically, this fee is 20% of the yields that are earned in the account, but it can be as high as 30% for certain hedge funds.
“Management Fees” are the annual fees which hedge fund managers charge to maintain the accounts of the investor. Typically, this fee is 2-3% of the account value, and is either deducted at the end of the year, or broken up monthly.
Though incentive and management fees are the most common amongst hedge funds, some funds may have other fees which apply as well. To make it simple for our readers, we have listed a few of these “less frequent fees” in the section below. Scroll down, and take a look!
Infrequent Hedge Fund Fees
1. Round Turn Fees: If you are investing in a futures or forex hedge fund, you may have a “round turn” fee for all of the trades placed on your behalf. This can be $20-40 per trade, which is very little to attain the high yields that are possible in these markets.
2. Front End Fees: Some hedge funds even have “load fees” (1-6% of investment), which are upfront costs due before the investor enters into the fund. This is used by hedge fund managers who feel they can justify it because of their strong historical yields. Though it may seem crazy, many investors are happy to pay 6% or more upfront to work with the right hedge fund manager.
3. Back End Fees: Many hedge funds will have fees which must be paid to close the account, and access the full balance. Though this is rare, if it does have to be paid, it is usually a very small amount (1-2% of account value).
4. Early Withdrawal Penalties: Most hedge funds have rules for how long the investor must keep their capital in the fund before withdrawing it. If the investor chooses to break these rules, there can be some steep penalties for doing so. In fact, penalties for most hedge funds can be as high as 20-40%+ of the amount you withdraw. The reason is, withdrawals hurt the yields of the hedge fund, and the historical yields are their key tool to attract new investors.
5. Additional Performance Fees: Some hedge fund managers will add clauses or goal-based incentives into the contract with the investor. This will give the hedge fund manager the opportunity to earn even higher fees if they meet certain net yield requirements. Either way, it is a win-win for both the investor and fund manager, since they each earn more profit in the long run.
Though there are a number of fees for hedge funds, the great thing is, there is NO POINT to be scared of them. If you do come across a hedge fund with high fees, always remember, hedge funds with higher fees usually return higher yields as well. If they can justify the fee hike, then it may even be worth going out of your way to invest with them. As a general rule of thumb, hedge funds managers typically charge both the incentive and management fee for new investors, and rarely have others that apply.
All in all, hedge fund fees are important to understand, but they should NOT be a critical factor when you are looking to invest. The fact is, REAL hedge funds quote their profits after all fees have been deducted, NOT before. In all reality, it doesn’t matter how much you are paying in fees, as long as the net yield meets the needs of your portfolio.
InsideTrade LLC Staff
Phone: (949) 444-2111