Generally, hedge fund structures incur management fees and performance fees. Management fees are typically a small percentage of the Net Asset Value of an investor’s interest in the fund per year. These fees are designed to pay for the expenses of the fund’s investment manager, and often include salaries, utilities, or office space/rent. Performance fees are sometimes also referred to as incentive fees, as they are designed as an incentive for fund managers to generate a profit for investors. An investor pays a performance fee only if the Net Asset Value of its interest in the fund increases over a specified time period. Simply put, managers do not get a performance fee if the fund does not make money for its investors.
Other terms explored in the presentation include high-water marks and hurdle rates. High-water marks are typically provisions that ensure fund managers only collect performance fees on the highest Net Asset Value previously attained at the end of any prior fiscal year. This means if an investor suffers a period of loss in the fund, he must first recoup those losses before the fund manager is able to collect a performance fee on any future gains. Hurdle rates are designed to ensure that investors are charged appropriate incentive fees based on the investment strategy of the fund.
Of course, all hedge fund fees charged to any particular investor are based on contractual terms agreed to by the fund manager and the investor. While there is no such thing as a “standard” fee, there are a number of general terms that apply to hedge fund fees. Learn more about other aspects of hedge funds from MFA’s other educational presentations.