The hedge fund management fee, or asset management fee, is a periodic fixed fee payable to the hedge fund manager based on the amount of the hedge fund’s assets.
How often do most managers take the asset management fee?
The management fee can be taken during any period of time but most managers will take the management fee either monthly or quarterly. Some managers may take the fee annually, or semi-annually, but this is much less common.
What is the most common management fee?
Most management fees range from 1% to 2% of assets under management.
The amount of the management fee will differ from manager to manager based on a number of factors including the strategy of the fund. In theory, the management fee is supposed to cover all of the manager’s expenses and costs such as the manager’s rent, salary for employees, computer equipment, etc. For certain strategies, the above expenses will be relatively low and for other strategies the expenses will be high. This should be one of the factors that a manager considers when deciding on the asset management fee.
Another consideration is the historical returns of the fund. Many of the major blue chip hedge funds will charge a larger management fee (in addition to a larger performance fee), which may be anywhere from 2.5% to 5%.
Hedge fund-of-funds will usually charge a management fee of 0.5% to 1.5%, with a vast majority of managers charging 1%. For hedge fund-of-funds, I most typically see a quarterly management fee that usually corresponds with the quarterly reports sent to investors.
HFLB note: if a manager is a state-registered investment advisor, the manager may not be able to have a management fee higher than 3%. Specifically, California has said a California-registered investment advisor cannot have a management fee which exceeds 3%. Additionally, the manager would probably need to include a disclaimer stating that a 3% management fee is in excess of the industry standard.
Management fees and leverage
Some hedge fund managers utilize leverage in their investment programs and they will want to receive the management fee based on the amount of assets being managed with the leverage as opposed to simply the capital account balances of the limited partners. Depending on what is provided in the offering documents, this may or may not be the default and managers who wish to receive the higher management fee should discuss this with their hedge fund attorney.
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