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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 ...................... To view our full article Click here
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