How Much Do Hedge Fund Managers Make?
The managers of the largest hedge funds in the world can often earn hundreds of millions -- if not billions -- of dollars for managing the funds of their investors and generating market beating returns. However, while some managers are seemingly swimming in cash, the compensation of a hedge fund manager is driven by the amount of funds under management and the underlying fee structure of the fund.
Other People Are Reading
-
Management Fee
-
Nearly all hedge funds charge a basic management fee that is expressed as a percentage of assets the fund is managing. The typical management fee ranges from 1 to 2 percent of assets under management and can be higher based on the expenses the fund incurs. Hedge funds have many operational costs including trading commissions, research analysts and general overhead. This management fee helps to offset the basic cost of doing business for the fund.
Performance Fee
-
The bulk of income generated from the wealthiest hedge fund managers is done in the form of performance fees. The hedge fund manager will take a significant percentage of the gains of the fund for a year -- sometimes 20 percent or more depending on the reputation of the fund manager. Often called the incentive fee, this encourages the fund manager to perform well and make good investments. If the hedge fund manages $100 million and grew it to $150 million, the fund manager can earn $10 million or 20 percent of the $50 million gain. This $10 million is far more than the $3 million the same fund would collect from a 2 percent management fee.
-
Redemption Fee
-
Hedge funds rely on having committed capital from their investors. If investors in the hedge fund are constantly requiring immediate, on-demand access to their funds, it can make it difficult for a fund manager to commit to a position that is meant to be for the longer term. Many hedge funds adopt a redemption -- or surrender fee structure -- that charges a fee to the investor when he wants to take monies out of the fund. The surrender fee can vary and may be expressed as a percentage of the withdrawal amount, with higher withdrawals subject to higher percentages. Hedge funds charge this fee to discourage withdrawals, as well as to cover the cost of redemption, particularly if an investor needs to withdraw a large sum of money immediately. If this is the case, the fund manager may experience short-term losses by liquidating a sizeable amount of stock and driving the price down.
Administrative Fee
-
Hedge funds, just like any service provider, may also assess various administrative fees to supplement its core fee structure. Although there is nothing universal, investors in hedge funds should not be surprised to be charged monthly statement fees, application processing fees, incoming wire fees and others. Often times, these fees are charged to the hedge fund and are simply passed through to the investor.
-
References
- "Reuters"; Top Hedge Fund Earners Take Home Billions; Svea Herbst-Bayliss; March 2009
- "The Wall Street Journal"; Hedge Fund Fees Too High?; David Walker; January 2009
- "Seeking Alpha"; Hedge Fund Fees: Is 2 and 20 Fair and Appropriate?; Christopher Holt; October 2009
- "The Christian Science Monitor"; Hedge Fund Fees Finally Coming Down; Joshua M Brown; February 2011
- U.S. Securities and Exchange Commission: Hedging Your Bets: A Heads Up on Hedge Funds and Funds of Hedge Funds
- "Hedge Funds Review"; Hedge Fund Fees Continue To Fall; Joanne Harris; April 2010
- Photo Credit Wall Street sign image by Jolanta Zastocki from Fotolia.com
