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Key Takeaways

Pass-through expense funds, where investors directly pay necessary investment costs, have on average delivered better investor returns.
Hedge funds that charge higher fees have tended to have higher net returns even after fees.

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

Source: Barclays Prime Services, "Performance by Fee Type and Level," July 2022

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.

Annual Returns Over Last 10 Years By Manager Expense Category

Source: Barclays Prime Services, "Performance by Fee Type and Level," July 2022