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Alternative Market Briefing

Other Voices: How to cut hedge fund fees in half (part 1)

Thursday, May 28, 2015

amb
Andrew Beer
This paper was authored by Andrew Beer, founder of Beachhead Capital Management LLC, New York. You can download the full paper here.

There is a strong argument that, on average, hedge fund fees today are double what they should be. Over the past five years, the typical hedge fund generated 2.3% alpha relative to a 60/40 portfolio before fees, yet negative alpha after fees.1 The difference is roughly the 300 bps or so that were paid in management and incentive fees. Granted, a 60/40 portfolio generated unusually high returns over the same period and many hedge funds did much better. However, when most investors are willing to pay 50% of true alpha generation, the notion of paying away more than 100% seems unjust.

The issue is that the fee structure of the industry has not evolved with institutionalization and asset growth. As veterans of the industry know, the 2/20 fee structure was designed to provide small hedge funds with an incentive to outperform. A high management fee would cover costs, while performance fees would align interests with investors -- an inducement to attract confident, talented managers to deliver exceptional returns.

How times have changed. Take a representative $10 billion equity long/short hedge fund. A 2% management fee generates $150 million or more in pure profits; often, the founder gets paid $100 million or more to walk ......................

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