Barclays Hedge Fund Analysis Finds that Pass-Through Expense Funds Outperform
Key Takeaways
Barclays recently analyzed how fees and expensing policies impact investor returns. They gathered a variety of data from nearly 300 funds. Among the multi-manager hedge funds in its sample, Barclays compared the performance of funds with a pass-through expense model—one in which charges necessary for the investment process are billed directly to investors rather than paid out of an often-higher management fee— to those that do not employ pass-through expenses. Over the last three years the pass-through expense managers produced after-fee returns of 11.8% versus 6.4% for peers without pass-through billing.
Annual Returns of Multi-Manager Hedge Funds By Expense Type
Barclays also categorized funds by relative expense levels. The low expense funds had management fees, which are charged annually irrespective of performance, that averaged 1%. These same funds had average incentive fees, the percent of investment returns that managers retain, of 13%. The medium expense funds averaged between 1.4% and 19% for management and incentive fees, respectively. The high expense category was 2% management fees and 20% average incentive fees. Investors in the high expense fund earned an 8.2% annual return for the last ten years versus those that earned 5.8% in the low fee funds. Every dollar invested in the high fee funds ten years ago would now be worth $2.20, compared to $1.75 in the low fee funds.