When investing in a hedge fund, investors place their money and their trust in the hands of fund managers, which can come in the form of a general or limited partnership or a limited liability company. They are compensated for their service with a fee structure that commonly consists of the following:
Whether a hedge fund endeavor pans out and performs well or not, the fund managers are paid with a management fee with a value that falls between 1 and 2 percent of the amount of the assets that are managed. There are even cases that this rate goes higher, especially if the fund manager has a proven track record.
Performance fee
Also called incentive fee, hedge fund managers are paid a percentage of the total profits that their endeavors gain. This serves as a reward for excellent performance. Most fund managers collect 2 percent of the net asset value and 20 percent of the profits as part of the “2 and 20” fee structure. However, like management fee, fund managers can collect a higher performance fee rate.
Many fund managers implement the high-water mark clause, which prevents managers that suffered from hedge fund losses in the previous years from charging a performance fee on new profits to offset the said negative gains.
Scott Tominaga is a renowned expert in the hedge fund industry. He has more than 17 years of experience in the field, as well as in financial services. For more articles like this, click here.
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