Hedge Fund Fees:

An Overview Managed Funds Association | June 2014

Introduction

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Professional asset managers, such as hedge fund managers, partner

with investors to help them meet their long-term financial goals. Just

as hedge funds invest in a diverse range of financial markets and

employ a variety of investment styles and strategies, fund managers

negotiate with investors to determine a fee structure to compensate

for their services.

This fee structure is often misunderstood, or misrepresented. The

following slides provide details and background on the types of fees

that hedge funds typically charge investors.

It is important to keep in mind that the following materials only present

general information about hedge fund fees, and the amount of fees

charged vary by hedge fund and investor. The fees charged to any

particular hedge fund investor are based on contractual terms agreed

to by the fund manager and the investor. In other words, everything is

negotiable and there is no such thing as a “standard” fee.

Types of Fees

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Hedge fund fee structures are generally comprised of

two main components:

• Management fees

• Performance fees

Sometimes, investors will refer to these fees as “X

and Y” where X is the management fee and Y is the

performance fee.

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2 Management Fees

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Hedge fund management fees are typically a small

percentage of the Net Asset Value of an investor’s interest

in the fund per year.

These management fees are designed to pay for the

expenses of the fund’s investment manager, which often

include:

• Employee salaries

• Office space / rent

• Technology / communications

• Utilities

3 Performance Fees

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Performance fees are sometimes also referred to as

incentive fees, as they are designed as an incentive for

fund managers to generate a profit for investors.

Unlike management fees, which an investor pays based

on the Net Asset Value of its interest in the fund, an

investor pays a performance fee only if the Net Asset

Value of its interest in the fund increases over a

specified time period.

Simply put, if the fund does not make money for its

investors, managers do not get a performance fee.

4 The “High-Water Mark”

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Many hedge fund performance fees include a “high-water mark:”

High-Water Mark: a provision serving to ensure that a Fund

Manager only collects Incentive Fees on the highest Net Asset

Value previously attained at the end of any prior fiscal year — or

gains representing actual profits for each investor.

This means if an investor suffers a period of loss in the fund, he

must first recoup those losses before the fund manager is able to

collect a performance fee on any future gains. High-water marks

are specific to each investor, and are calculated based on the net

asset value of the fund at the time of its investment.

5 Hurdle Rate

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Many hedge funds also employ a “hurdle rate” when

determining performance / incentive fees.

Hurdle Rate: a fund’s minimum investment return

necessary for a fund manager to start collecting incentive

fees. The hurdle is usually tied to a benchmark rate such

as Libor or the one-year Treasury bill rate plus a spread.

Hurdle rates are designed to ensure that investors are

charged appropriate incentive fees based on the

investment strategy of the fund.

6 Fund Expenses

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In addition to management fees and performance

fees, fund investors are also charged for the

expenses of the fund. These fund expenses are

based on contractual terms agreed to by the fund

manager and the investor, and are described in the

fund documents.

Examples of fund expenses include legal, accounting

and certain investment expenses incurred by the fund

as part of its operations.

Investors should review and understand these

expenses, as they are paid for out of the assets of the

fund.

For More Information

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For more information, please visit

www.managedfunds.org.

For the definition of terms in this presentation and others

related to the hedge fund industry, please visit MFA’s

Hedge Fund Glossary, brought to you in partnership with

Latham & Watkins.

Follow MFA on Twitter: @MFAUpdates

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