Hedge Fund Fees
| Nov 13th, 2006 | Filed under: Investment Management Fees | By: Alpha Male |
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By: Lex, FT.com
Published: October 31, 2006
Alpha Male is a big fan of FT and FT’s new “Alphaville” website in particular. But I’d like to take issue with another pseudonymous scribe regarding a piece appearing on FT.com October 31.
In an attempt to scare investors on Halloween Night, the FT’s “Lex” makes some fallacious arguments about hedge fund fees that are downright spooky. If you don’t subscribe to FT, you can get a free trial to view this article. But you’ve undoubtedly seen this type of anti-hedge fund diatribe before anyway.
As the chart to the right illustrates, says Lex, hedge fund fees have not come down even though hedge fund returns have been diminishing.
We respectively submit the following:
1. As the chart clearly indicates, performance fee rates have remained constant at around 20%. With falling returns, overall hedge fund fees have therefore actually fallen. That’s a lot more than can be said about mutual fund fees – which, because they are based solely on assets under management, have remained stable even though their returns have also fallen.
2. The chart also shows that hedge fund management fee rates have not increased. They remain stable at around 2%. As we have argued many times recently, 2% for un-correlated or low-correlated returns is a steal compared to the fees paid for the scant amount of uncorrelated (alpha) returns embedded within many mutual funds. For example, if the bulk of a mutual fund’s return can be replicated with an ETF at an annual fee of about 0.20%, imagine what the implicit fee must have been on the uncorrelated remainder.
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