Why are hedge fund commission costs rising?

Investors' eagerness to allocate more money to expensive hedge funds has pushed up average fees for the first time in a decade.
Management and performance fees fell every year between 2014 and 2023, according to a survey of 238 hedge fund investors conducted by BNP Paribas, except for 2020 and 2021, when the French bank did not record the data, as investors have pulled money out of the sector following often lackluster returns.
However, according to the survey, annual performance fees increased to 17.82% this year from 16.91% in 2023, the highest level since 2016.
Management fees increased to 1.54% from 1.46% last year.
Hedge funds are historically known for a “two and 20” fee model, where investors pay 2% in management fees each year and 20% on any performance gains.
In reality, investors rarely pay such high fees, especially for small and medium-sized hedge funds.
The increase in fees in 2024 reflects how global investors are pouring billions of dollars into multi-manager hedge funds that emulate Ken Griffin's Citadel and Izzy Englander's Millennium funds that have come to dominate the sector.
These firms pursue expensive models that may rely on hundreds of portfolio managers trading a variety of strategies across the markets, and therefore charge higher overall fees than the average hedge fund.
Many have consistently delivered big returns for investors, even during downturns in stock markets.
These companies often charge 20% performance fees.
Marlin Naidoo, head of capital infusion at BNP Paribas, said allocators had allocated money to large managers who tended to have higher performance fees, driving up that figure.
Some multi-managers do not charge management fees, many opt for a so-called pass-through model where they charge all expenses, including salaries and technology expenses, directly to investors.
In practice, the pass-through model equates to fees on investor assets of between 3% and 10%.
BNP's survey does not count the transfer fee as a management fee, but takes into account multi-managers who charge a management fee, which is often higher than the industry average.
“[Investors] have also allocated funds that pass some costs on to investors who also charge a management fee of 2% or higher, which has resulted in an increase in commissions paid,” Naidoo added.
The pass-through model is controversial with some investors, who argue that it does not incentivize management to contain costs.
BNP Paribas' survey showed that last year investor returns from managers who did not adopt the pass-through model beat hedge funds that did.
The Financial Times previously reported that some multi-manager hedge funds that apply pass-through, such as Balyasny and Schonfeld, had a disappointing year in terms of performance in 2023.
© The Financial Times Limited 2024.
All rights reserved.
It may not be redistributed, copied or modified in any way.
The Financial Times is not responsible for the accuracy or quality of this translation.
Money.it has rights to republish some limited articles from the Financial Times.
This is not a live feed of Financial Times content.