Question: What costs does a hedge fund pay for and what costs does the hedge fund management company pay for?
Answer: This is another very common question. Most hedge fund offering documents provide a boilerplate approach for splitting costs between the hedge fund and the management company. The general rule of thumb is that any cost which is directly associated with the fund’s investment activities (e.g. brokerage costs) will be paid for by the hedge fund. Any cost which is directly associated with the management company’s operations or overhead (e.g. salaries) will be paid for by the management company.
There are some costs which, arguably, could go either way – one such item is a Bloomberg terminal. A Bloomberg terminal could arguably be an expense of the management company (a Bloomberg is an informational tool similar to magazines and other information that a manager must use to shape its decision-making process) or of the hedge fund (information from the Bloomberg is directly attributable to investment decisions which are made). I do not have a bias as to which entity should pay these fees; however, a hedge fund manager with a smaller asset base that pays for the Bloomberg out of the fund must beware of the effect of Bloomberg’s costs on the fund’s performance.
Hedge Fund Expenses
- hedge fund management fee
- hedge fund performance allocation
- offering and other start-up related expenses (often the management company will pay these expenses)
- the administrator’s fees and expenses
- accounting and tax preparation expenses
- all investment expenses (such as brokerage commissions, expenses related to short sales, clearing and settlement charges, bank service fees, spreads, interest expenses, borrowing charges, short dividends, custodial expenses and other investment expenses)
- costs and expenses of entering into and utilizing credit facilities and structured notes, swaps, or derivative instruments
- quotation and news services (Bloomberg, NASDAQ) (or can be a management company expense)
- ongoing sales and administrative expenses (e.g. printing)
- legal and fees and expenses related to the fund (include Blue Sky filing fees)
- optional: professional fees (including, without limitation, expenses of consultants and experts) relating to investments
- optional: the management company’s legal expenses in relation to the Partnership
- optional: advisory board fees and expenses
- optional: reasonable out-of-pocket expenses of the management company (such as travel expenses related to due diligence investigations of existing and prospective investments)
- other expenses associated with the operation of the hedge fund, including any extraordinary expenses (such as litigation and indemnification)
Hedge Fund Management Company Expenses
- offering and other start-up related expenses (often the fund will pay these expenses)
- salaries, benefits and other related compensation of the management company’s employees
- maintenance of its books and records
- fixed expenses
- general purpose office equipment
While the above list of expenses is fairly standard, please remember that these expenses can be switched around to a certain extent. If you are a hedge fund manager, you should discuss with your attorney how the expenses are split between the hedge fund and the management company.