HEDGE funds have long been regarded as notoriously expensive. A new research reveals just how costly they truly are for their clients.
Of the US$3.7 trillion in profits they have earned as an industry since 1969, nearly half or a staggering US$1.8 trillion was gobbled up as fees, according to estimates by LCH Investments, a fund of hedge funds. With soaring assets, hedge funds have raised their charges to 50.4 per cent of gains, up from the roughly 30 per cent they earned until the early 2000s.
This is the first time LCH has ever quantified the high expenses that have become the bedrock of hedge fund firms and have helped mint multiple billionaires over the years. Warren Buffett once described those fees as “a compensation scheme that is unbelievable,” while Bill Gross, the co-founder of Pacific Investment Management, called them a “giant ripoff”. Such criticisms have largely been brushed off by an industry that researcher HFR says has grown sevenfold this century to manage a record US$4.5 trillion.
“The Great Financial Crisis of 2008 presented an opportunity for a reset in the way hedge funds charge fees to investors,” Rick Sopher, chairman of LCH, said. “This opportunity was largely missed.”
The charges were, in part, the result of investors not recovering fees already paid when they redeem or funds close after losses, Sopher said. “This factor becomes particularly meaningful during periods when hedge funds suffer significant losses such as the global financial crisis of 2008 and in some subsequent years,” he added.
Hedge funds charge a fixed management fee, with the largest of them increasingly introducing a so-called pass-through expenses that allow them to charge clients for anything from bonuses, hiring cost, research, entertainment to other expenses. When hedge funds make money, they also keep typically 20 per cent of the profits as performance fees. When they lose, clients take the entire hit in addition to paying the fixed or pass-through costs.
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LCH studied fees as part of its annual ranking of the most profitable hedge funds in the world.
DE Shaw & Co topped the table as the most profitable hedge fund for 2024, followed by Izzy Englander’s Millennium Management. Ken Griffin’s Citadel, which leads peers for the most money made by a hedge fund since their launch, was placed third last year.
The annual survey focuses on money managers with the most overall profits in absolute US dollar terms since inception, and as a result the largest and oldest hedge funds typically tend to do best. The top 20 firms, which oversee about a fifth of the industry’s assets, generated US$93.7 billion or roughly a third of the industrywide gains last year.
As measured by a more traditional way of assessing returns, the top-20 grouping gained 13.1 per cent on an asset-weighted basis, outperforming returns of 8.3 per cent across all funds. BLOOMBERG
