There are fixed and variable hedge fund fees

Hedge fund fee structure 2/20

Hedge fund managers typically charge two kinds of fees. One is annual management fee, usually in the range of 1% to 2%. On top of it, there is performance fee, which can be as high as 20% of the gains. Quite often a Hurdle Rate is set. It is the required minimum positive performance that a fund needs to achieve before a performance fee can be charged. This rate can be based on such reference point as a performance of a specific index.

Another concept related to hedge fund fees is the High Water Mark. It’s designed to prevent a manager from charging fees if the fund’s value has declined in the previous period. Let’s say that in the previous year the fund’s NAV declined by 10%, while this year the NAV has increased by 9%. In comparison to the previous year, the NAV is still “under water,” so a hedge fund manager will not get a performance fee for this year even though a positive gain was made because the fund is still down by 1 percent.

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Overview of Hedge Fund Fees: A Hybrid Structure

Hedge fund fees can be substantial. However, they also partially depend on performance, therefore, there's a hybrid fee structure unseen when it comes to mutual funds or ETFs.